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China still adding to crude inventories even as oil refining jumps

(Reuters) - China still added more crude oil to inventories in the first two months of the year, despite lower imports and higher refinery processing rates.

About 270,000 barrels per day (bpd) of crude was added to commercial or strategic inventories over January and February, according to calculations based on official data.

This was down from the 1.19 million bpd in December and the 740,000 bpd for 2022 as a whole.

The slower flow into storage tanks does support the market's bullish view for a rebound in China's oil demand in 2023 as the world's largest crude importer stimulates and reopens its economy after growth was crimped last year by the now abandoned strict zero-COVID policy.

But the fact that China is still building inventories also sounds a note of caution as it suggests that even as they ramp up processing rates, refiners still have bulging stockpiles to draw upon should the price of imported oil rise to levels they deem too high.

While the current oil price has been knocked lower by the two bank failures in the United States and the rapid takeover of struggling Swiss lender Credit Suisse, the market expectation is that a reinvigorated China will drive global oil demand this year, leading to higher prices.

China doesn't disclose the volumes of crude flowing into or out of strategic and commercial stockpiles, but an estimate can be made by deducting the amount of crude processed from the total of crude available from imports and domestic output.

The total volume of crude available from imports and domestic production in the first two months of the year was 14.63 million bpd, consisting of imports of 10.4 million bpd and local output of 4.23 million bpd.

The National Bureau of Statistics combines data for January and February to avoid distortions from the timing of the annual Lunar New Year holiday, which fell in late January this year.

Refinery throughput rose 3.3% year-on-year in the first two months to 14.36 million bpd, meaning the volume of crude available exceeded the amount processed by 270,000 bpd.

Mixed picture

Looking deeper into the data for the first two months shows that crude imports are yet to reflect any rebound in China's demand, as they were 1.25% below the level for the same period in 2022.

However, crude imports are a lagging indicator as it takes up to five months from when a cargo is arranged to when it is delivered and processed in a refinery.

This means that if China's refiners shifted to a positive outlook for demand around the time in December when the zero-COVID policy was ended, it would only be from April onwards that imports would start to lift.

The gain in refinery processing is also a positive, as it does indicate an increase in domestic fuel consumption.

But part of the increase is because refiners were encouraged, through the granting of new quotas, to increase exports of refined products.

Exports of refined oil products - which included diesel, gasoline, aviation fuel and marine fuel - soared 74.2% in the January-February period from a low base a year earlier to nearly 12.7 million tonnes, according to official data.

This equates to about 1.72 million bpd of exports, using the BP conversion factor of 8 barrels of product per tonne.

Putting all the data together gives a somewhat mixed picture, as crude oil imports are still soft, refinery processing is strong, but a larger share of what was processed was exported to take advantage of high regional fuel prices, especially for diesel.

It's likely that China's oil demand will rise in coming months as the economy continues its uneven recovery, but the question is whether this rise in fuel consumption will be met by additional crude imports, or whether refiners will dip into inventories.

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