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China boosting crude inventories even as refining, fuel exports gain: Russell

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LAUNCESTON — China’s refineries added to crude oil stockpiles in October even as they increased their processing rates and boosted fuel exports to take advantage of high prices for refined products in Asian markets.

China’s refineries processed the equivalent of 13.8 million barrels per day (bpd) in October, just below the 13.82 million bpd recorded in September, which was the highest in nine months.

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However, the volume of crude available to refineries was 14.22 million bpd, consisting of imports of 10.16 million bpd and domestic oil production of 4.06 million bpd.

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That means the volume of crude available exceeded the amount processed by 420,000 bpd, with the extra oil flowing into either commercial or strategic stockpiles.

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.

Over the first 10 months of the year, China added about 690,000 bpd to inventories, largely because refinery processing was weak in the first half of the year amid soft domestic fuel demand as the economy was crunched by a series of lockdowns as part of Beijing’s strict zero-COVID policy.

China exported 4.46 million tonnes of refined products in October, equivalent to around 1.15 million bpd, using the BP conversion rate of 8 barrels to one tonne.

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This was actually down from September’s 1.5 million bpd of product exports, but it’s worth noting that the three strongest months this year for refined fuel exports have been August, September and October, reflecting that refiners were granted additional export quotas and used them to capture the high margins, especially for diesel.

Fuel exports are expected to remain at elevated levels in November as refiners use up their remaining quotas for 2022.

This in turn will likely drive an increase in both crude imports and refinery processing rates, with Wood Mackenzie senior analyst estimating November throughput at 14.4 million bpd.

China’s November crude imports are estimated at 11.46 million bpd by Refinitiv Oil Research, which would be an 11-month high.

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Exports of refined products could reach 1.6 million bpd in November, according to analysts and China-based industry sources, with diesel shipments tipped to rise to a 17-month high of up to 570,000 bpd.

CRUDE IMPORTS TO DROP?

Overall, the picture that emerges is that the strength in China’s crude oil imports in recent months is largely a reflection of increased product exports, rather than any sign of a rebound in domestic demand.

It’s also the case that China is still importing more crude oil than it actually needs, which raises the possibility of weaker imports in the months after November.

Several Chinese refiners have requested lower volumes from top supplier Saudi Arabia in December, Reuters reported on Nov. 11 citing industry sources.

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It’s also been reported that Chinese refiners are slowing their purchases of Russian crude amid uncertainty over G7 plans to cap the price as part of efforts to punish Moscow for its Feb. 24 invasion of Ukraine.

Russia has vied with Saudi Arabia as China’s top supplier this year, as Chinese refiners snapped up cargoes at steep discounts as European and some Asian buyers such as Japan started to shun Russian crude.

There is still considerably uncertainty over how the proposed price cap on Russian crude will work in practice, and what the impact will be of the European Union ban on oil imports, due to start on Dec. 5.

It appears Chinese refiners have bought up more crude than they need in recent months, most likely to ensure they have sufficient inventories in case of any disruptions.

Overall, the recent strength in China’s crude imports may not be long-lasting, especially if new refined fuel export quotas aren’t granted.

Much will depend on whether Beijing’s efforts to kickstart the sluggish economy and some relaxation of COVID-19 measures result in stronger domestic fuel demand in the new year.

(Editing by Stephen Coates)

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