China again draws on crude oil inventories; Asia demand stays soft
China drew on its stockpiles of crude oil for a second consecutive month in May, a further sign that the world's biggest oil importer is prepared to draw on its massive inventories when it deems prices to be too high.
China's refiners processed about 589,000 barrels per day (bpd) more crude than what was available from imports and domestic output, according to calculations based on official data.
The country doesn't disclose the volumes of crude flowing into strategic and commercial stockpiles. But an estimate can be made by deducting the total amount of crude available from imports and domestic output from the amount of crude processed.
Refiners processed 60.5 million tonnes of oil in May, a record high, up 4.4% from the same month in 2020, according to data released last week by the National Bureau of Statistics. The volume of crude processed was equivalent to 14.25 million bpd.
Imports in May were 40.97 million tonnes, while domestic production was 17.03 million, giving a combined 58.0 million available to refiners, or about 13.66 million bpd.
Subtracting that from the crude available from the refinery runs leaves a gap of 589,000 bpd, up from a gap of 280,000 bpd in April.
This means refiners in May again likely used some of their bulging inventories, largely built up during last year's price collapse.
China snapped up large volumes of crude when prices plunged to two-decade lows during the pandemic, which coincided with a brief price war between top exporters Saudi Arabia and Russia.
China imported so much crude in the middle part of last year that long vessel queues built up outside ports, and the country struggled to offload the cargoes.
By the end of last year, Chinese refiners tapered imports as they exhausted permits, resulting in rare inventory draws in October and December.
Storage flows resumed in the first quarter of the year as independent refiners bought crude with their new 2021 import quotas.
These cargoes would also have been arranged toward the end of 2020, when global oil prices were still recovering from their lowest point in two decades, with benchmark Brent futures trading between $46 and $52 a barrel in December.
CRUDE PRICE
However, crude rallied sharply from the start of 2021, and at $73.73 a barrel in early Asian trade on Monday, they are up about 42% from the end of last year.
Higher prices may have acted as a deterrent for Chinese buyers to continue adding to stockpiles, and they are most likely planning to only import as much as they aim to process, and to ensure sufficient working inventories at plants.
Until recently it was extremely rare for Chinese refiners to draw on stockpiles, but this has now happened in four of the last eight months.
A relatively large draw on inventories in May suggests Chinese refiners are willing to dip into stockpiles rather than buy cargoes at prices they may deem to be inflated by speculative commodity flows, rather than reflecting underlying demand and supply fundamentals.
So far this year the experience of crude oil buyers in Asia has been different from those in Europe and North America, where demand is recovering as economies reopen after shutdowns to combat the pandemic.
Many Asian nations are still under some form of restrictions, and travel around the region is still well below pre-pandemic levels, meaning that oil demand in the world's top-consuming region has yet to show any meaningful recovery.
Asia's imports for June are estimated at 24.89 million bpd by Refinitiv Oil Research, which is a recovery from May's 22.86 million bpd.
However, it also means June's imports are more or less in line with the 24.54 million bpd from April and the 24.79 million bpd in March.
It is possible that Asia's imports will recover starting in the third quarter, assuming that more economies open fully, but with crude oil prices at their highest point in 26 months, demand is also likely to be crimped by a lack of affordability. (Editing by Gerry Doyle)
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