BEIJING: China will continue to be the engine of global demand growth, thereby providing underlying support to prices. It’s not an unreasonable assumption, given that the world’s largest importer brought in 8.4-million barrels per day in 2017, 10.1% more than in the prior year, according to customs figures.
The extra 800,000 barrels per day China imported in 2017 was about half of total global demand growth. However, there are increasing signs that China’s crude oil imports are moving toward becoming a zero-sum game, insofar as much of the rise in imports is being exported as refined fuels. A zero-sum game is when the gains of one group are cancelled out by the losses of another. While China isn’t exporting every extra barrel of crude it imports as refined products, it is increasing its overseas fuel sales, thus potentially displacing crude demand at refiners it is successfully challenging for market share. China will import 452-million tonnes, equivalent to 9-million barrels per day in 2018, a gain of 7.7% from 2017, state-owned major China National Petroleum Corp (CNPC) said in its annual outlook released earlier in January. That would be an increase of about 600,000 barrels per day in imports from 2017, a slower growth rate than what was achieved in 2017 but still a significant pull on global demand for crude. However, CNPC also forecast that China’s refined product shipments would surge in 2018, with net diesel exports expected to jump 47% to 23.8-million tonnes, or about 509,000 barrels per day.
Net exports of petrol were forecast to increase 23% to about 12.8-million tonnes, or about 298,000 barrels per day. Full-year figures have yet to be released by China customs, but for the first 11 months of 2017 diesel exports were about 342,000 barrels per day and petrol shipments were about 217,000 barrels per day. If CNPC’s forecasts are accurate, this implies that in 2018 diesel exports will rise by about 167,000 barrels per day and petrol by about 81,000 barrels per day. Taken together, it means that about 230,000 barrels per day of China’s additional crude demand in 2018 will simply be refined and sent back to the global products market. China’s fuel exports may affect crude. This fuel can be absorbed if there is sufficient demand growth for refined fuels, but if there isn’t, then China’s additional refined product exports may end up displacing crude demand in other countries that export fuels. In the Asian context this means India, Singapore, Japan and South Korea, all of which have refineries that export some, or even significant amounts, of their production. There are already signs that Chinese exports are having some effect on refinery profits in the region, with the margin per barrel at a typical Singapore refinery dropping to $6.22 during Thursday’s trade down from the recent peak of $9.07 in September, and also below the 365-day moving average of $7.01. Of course, higher crude oil prices are also squeezing margins in Asia, but a surge in exports from China is likely to be the last thing the region’s refineries will be wanting.
