China’s crude oil import levels will continue to be one of the factors to watch in the oil market this winter, but the world’s top importer will have a relatively limited influence on an oil market buffeted by an energy crisis, sanctions, and an economic slowdown.
Global oil demand is expected to take a hit in the coming weeks after China started announcing at the end of October renewed Covid restrictions and lockdowns in areas in several major cities, including Guangzhou, Wuhan, Xining, and Beijing.
Still, Chinese crude oil imports are likely to be robust in November and the early part of December as producers from around the world are estimated to have loaded in October the highest volumes bound for China in ten months.
The impact of the latest round of COVID restrictions across China has yet to be felt. Oil imports could ease at the start of next year if refiners see lower domestic consumption in the coming weeks.
One bullish factor for Chinese oil imports is the large fuel export quota allocated to refiners for the end of this year and possibly early next year after China issued its biggest fuel export quotas to its refiners for 2022 at the end of September. The quota could be rolled over into early 2023.
The short-term trends in Chinese demand and refinery throughput will be key drivers of oil prices, not only in the physical but also in the paper market, which has shown time and again that it is sensitive to news about the potential weakening of China’s oil demand due to the Covid curbs.
But unlike in other, more peaceful times, Chinese crude imports will not be the biggest story in the oil market this winter.
The energy crisis, the EU embargoes on Russian crude and products—set to take effect in early December and early February, respectively—as well as the macroeconomic headwinds with aggressive interest rate hikes and high inflation will all play a part in setting the direction of oil prices in the coming months.
China-bound crude tankers with their destination declared loaded as much as 9.3 million barrels per day (bpd) of oil in October, up by 500,000 bpd from September, and the highest in at least ten months, according to tanker-tracking data compiled by Bloomberg.
Considering that more October-loaded tankers have yet to declare destinations, and some may not declare at all—for example, tankers carrying oil from Iran, Venezuela, or Russia—Chinese imports in November and December could be relatively high.
That’s because Chinese refiners started to ramp up purchases in September when the October-loaded cargoes were likely contracted amid expectations of a pick-up in demand.
Yet, “The new lockdown threw a curve ball on that theory,” Mark Williams, a research director at Wood Mackenzie, told Bloomberg.
The impact of the most recent Covid restrictions has yet to be felt in fuel demand and refiners’ decisions to buy oil in the coming months. Chinese refiners, however, now have another batch of fuel export quotas and could boost refinery runs regardless of potentially weaker domestic demand.
In September, increased fuel export quotas and robust export demand sent China’s overseas shipments of refined products surging by 36% annually to the highest level since June last year. The fresh batch of fuel export quotas was widely expected in a move seen as an attempt from China to revive its economic activity, which has suffered from snap Covid lockdowns and a real estate crisis since the spring.
It’s unlikely that China’s higher fuel exports will directly impact the European and U.S. diesel supply, but other refiners in Asia could boost exports to Europe in the coming months as the EU would be looking to replace its diesel imports from Russia.
Chinese crude oil imports, refinery runs, and fuel exports will be closely watched as always, but the EU embargo, the energy crisis, and fears of looming recessions could overshadow the importance of Chinese data for the oil market this winter.
By Tsvetana Paraskova for Oilprice.com