Global Oil Demand Set To Tumble As China Cracks Down On Teapot Refiners

Tyler Durden's picture

One week ago we reported (for the second time) that one of the biggest mysteries for the global oil market, and certainly the biggest wildcard for future oil prices, is the current state of China's Strategic Petroleum Reserve. As JPM reported , China's SPR demand was equivalent to approximately 1mm bpd. More importantly, stopping shipments for the reserve would wipe out about 15 percent of the country’s imports. More to the point, according to JPM, and contrary to official data, China's strategic oil reserve was approaching capacity, which going back to JPM's June calculation, meant that "our base case assumes China continuing high volumes of (1mbd) SPR builds through August, while factoring in 7% domestic crude production decline and 2% refinery throughput increase. This means 15% mom decline in China’s crude imports in September, or 1.2mbd loss from the China inventory demand. China’s net oil imports ytd has expanded 16% yoy, versus a flat consumption growth."

This has been cited as one of the reasons why China's relentless demand for oil, which in early 2016 hit a record level of monthly import, has seen a modest decline in recent months.

However, it appears that the mystery over China's SPR is no longer the main driver when it comes to the future of Chinese demand. According to Oilchem, a Shandong-based industry researcher, China's major refineries cut runs to 70.3% of capacity as of September 1, down -1.43% from Aug. 18. To be sure, a big part of the utilization rates decline emerged as the Sinopec Qilu refinery with 8m ton/yr capacity, started maintenance. Oilchem expects the tuns to rebound in mid-Sept. as some plants will resume after works.

That, however, may prove optimistic, because while we don't doubt that China's major refiners do come back on line in short notice, the biggest variable for China's recent oil demand, the blistering pace of refining by China's smaller, "teapot" refiners, may be about to see a steep decline. The reason is that, as Bloomberg wrote over the weekend, suddenly "everyone wants a share of the world’s hottest oil market, including China’s taxman."

Which brings us to the teapots: as Bloomberg adds, "purchases by the country’s independent refiners, granted permission last year to buy foreign crude, have soaked up some of the global oil glut and helped revive prices after the biggest collapse in a generation. Sellers from Saudi Arabia to BP Plc have been supplying the plants known as teapots, which account for a third of the nation’s processing capacity." 

Chinese "teapot" refinery

And now, the blistering crude oil demand from China may be about to hit a brick wall as a "government tax crackdown threatens to constrain this new source of demand from China, which rivals the U.S. as the world’s biggest importer."

How much is at stake? No less than a whopping 1.4 million barrels per day in teapot demand, more than all of Saudi Arabia's supplies to the world’s second-biggest user of oil.

Putting this number in context, China’s oil imports have averaged an unprecedented 7.5 million barrels a day so far this year, boosted by the teapots, government data show. The purchases, along with production outages in Nigeria and Canada, helped benchmark Brent crude jump almost 90 percent from mid-January to June.

Cited by Bloomberg, Wang Pei, a senior analyst at Unipec, the trading unit of China’s largest state-run processor, Sinopec said that the government crackdown "is sort of a warning to independent refiners. It has been tough to implement proper tax compliance among independent refiners."

One of the reasons why last year's excess supply surge did not have an even more pronounced impact on prices is thanks to the demand that was brought online by China's independent refiners: teapots started getting licenses to import foreign crude last year as part of a government effort to boost private investment in China’s energy industry. The refiners previously had to rely on state-owned oil majors including PetroChina  and Sinopec for supplies of crude. They still have to adhere to a quota determining how much they can import. Nonetheless, as the WSJ reported in May, "‘Teapot’ Refineries Shore Up China’s Demand for Crude" and Bloomberg added a month ago that "Oil Refiners Struck by Glut Find Comfort in China Teapot Drought."

However, that "silver lining" is about to be brushed off as authorities "are clamping down on anyone skirting the rules. The National Development and Reform Commission on Aug. 23 said the government will disqualify license applications or revoke import quotas if companies evade tax or falsify documents. Nobody replied to a fax seeking more details sent to China’s NDRC after regular working hours on Monday or answered calls to the press office."

To be sure, while it is highly unlikely that all of the 1.4mmbpd in teapot demand could come off line, there will be a substantial cut in demand. Bloomberg notes that while local authorities in Shandong province, where the refineries are clustered, will support the industry, "import licenses granted by the government may drop by the equivalent of 400,000 barrels a day next year to 1 million barrels amid the crackdown on tax evasion, according to consultant Energy Aspects Ltd."

Processing rates at teapots “will be curbed by the government’s regulation on taxation and operations,” Zhang Liucheng, director and vice president of Shandong Dongming Petrochemical Group, the biggest Chinese private refiner, said in an interview in Singapore on Monday. The company is tax-compliant, having paid 1.7 billion yuan ($255 million) in tax last year and 2.6 billion yuan in the first eight months of 2016 as it started refining imported crude, Zhang said.

Needless to say, for price purposes, a 400,000 bpd drop in global demand is the equivalent of a 400,000 bpd production surplus by OPEC or non-OPEC sources, certainly when it comes to price.

The importance of teapots to what remains a market mired in excess OPEC oversupply, was highlighted earlier this year when one of them purchased a spot cargo from Saudi Arabia, which broke from its usual policy of selling only under long-term contracts. Iran’s state-run oil company is said to be in talks to sell more crude to Trafigura in a strategy that may help it break into the market to supply the independent refiners.

If and when a substantial number of teapots are suddenly put offline by the government, both Saudi Arabia and Iran will scramble to find alternative buyers. To do that, they will have to offer generous price concession.

Among the notable losers from a teapot crackdown would be the independent commodity companies, such as Vitol, Glencore and Trafigura who have generated substantial profits shipping oil from the middle east to these sources of demand. As Chin Hwee Tan, the CEO for Asia-Pacific at Trafigura, said “the advent of the Chinese private refiners as major buyers of crude and exporters of product has been the biggest change in the market since the shale revolution. We’re doing significant business with them.”

Finally, it's not just taxes: teapots face other headwinds including port and pipeline infrastructure not developing as fast as oil purchases. Chinese imports are also at risk of slowing because of ship traffic and lack of storage capacity. Concern about creditworthiness and lack of experience in international trade are also challenges. Slowing refining profits have forced cuts in processing rates, while the implementation of higher fuel-quality standards could force some of them to shut.

To be sre, some remain optimistic, such as BP, according to Andy Milnes, BP’s CEO of integrated supply and trading for the Eastern Hemisphere. Shandong Dongming last year got crude from the company as part of a long-term supply contract.

In spite of China’s clampdown, the government is still working toward “liberalizing oil markets, and would continue to encourage the operations of independent refiners,” according to Unipec’s Wang. “Many of them perhaps account for 70 to 80 percent of tax revenue in their cities, so the local government will want to keep them alive.” However, if there is one thing that is certain about Chinese "liberalization" reforms it is that things are certain to get much worse before, and if, they ever get better, once the government starts micromanaging every aspect of yet another formerly independent industry's transition.

* *  *

That covers the demand side of the equation. As for the supply side, the store is well-known. As the following chart reveals, most OPEC members are producing more oil now than they were in January, or at any time during the past year.

To summarize: OPEC oil production near record and rising, shale slowly returning on line with every weekly increase in Baker Hughes oil rigs, while demand is about to see a sharp drop due to either China's SPR nearing capacity, or the crackdown on teapots that is about to cut Chinese demandby as much as nearly half a million in barrels. How this will impact price, we leave to the central bankers to figure out, whose only recourse may be to start buying commodities in the open market, in addition to bonds and stocks, thus nationalizing yet another market.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
King Tut's picture
King Tut (not verified) Sep 6, 2016 12:35 PM

the Chinese gubmint should buy all 50B of them a no-gas Tesla- should be no pro-blem-o with Elon ramping up production

ACES FULL's picture

I'm a little teapot.

Cautiously Pessimistic's picture

Oil, Oil everywhere, but not a drop to drink.

Pliskin's picture

And still China continues to buy oil for $$$$ do you know why?

Because they're a bunch of pussy fucks, whiplashed by the U.S. Good old President Xi's daughter goes to school in the U.S. as do most of the CCP crew, these mother fuckas will sell their country, soul and life to the U.S. $$ they're a bunch of fucking faggots.

FUCK THE CCP and the little dicked camel they rode in on, the bunch of fucking faggot, bitch, ass cunts!

Oh, by the way, I live in China, If the 'Boyos' want to come and get me, feel free, you slimy assed, yellow, nigga loving cunt holes...I'm waiting!!

Nah, thought so, to fucking yellow to try it with a big lad like me.

I don't profess to be a 'Hard man' but I'd snap at least a dozen necks before they got to me!

Come on bitches!  You know where I live!

Yeh, thought not....Queer cunts!

Ahem!  Rant over!

Sorry ZH'ers, but you gotta do what you gotta do!

 

 

Sinophile's picture

While your 'rant' carries no logic whatsoever, it does indicate that you must be very under-hung.  And as far as you living in China, I doubt it.  I say you live in your mom's basement, in Sidney.  You have my sympathy.  I would tell you that it will get better for you, but it won't.  You will always be a loser.  Why have I even bothered to comment?  Good question.  Some perverse form of watching the worm turn, I suppose. 

KnuckleDragger-X's picture

I can drive you around my hometown at a 100 mile radius and show you where at least a half dozen refinery's used to exist. They were regulated out of existence by the government in the late 70's and 80's. China isn't bothering to write regulations because decree is much faster.....

Consuelo's picture

 

 

America's hollowed-out economy in large degree owes to just the type of 'regulations' you speak of...

new game's picture

and small business regs, compliant with lobbiest written fascist law. trying to be a teapot in a big keg world is sooo reg rich i need a coindexter to get thru it. fucken - eh do i want to fukin explode.

cdl>authority to run>16 pages loaded with bullshit regs>irp/ifta>workmans comp>commercial ins.>state authority>monthly logs>ein acct>state acct>apportioned plates>quarterly taxes>LLC articles of inc.>truck/trlr equip inspection>finally after employing half of the federal and state reg wonks a guy might be able to chase a buck...

Consuelo's picture

 

 

Is that the little teapot Great Wall in the background...?  

ACES FULL's picture

Why,we all know its foolish and virtually IMPOSSIBLE to build a wall.

Consuelo's picture

 

 

With war on the way, China's SPR is going anywhere but standing still.   And no amount of 'Bloomberg' will ever get the truth of their true reserves anyway.

Doom Porn Star's picture

An real naval blockade and embargo will change everything.

Japan was practically dragged into WW2 by an oil embargo and even the US had it's lemons squeezed pretty hard with one if I recall correctly.

The question is: who is gonna do the dragging and squeezing this time, and who is going to go all in on WAR to get the fuel that feeds their economy and keeps food in the bowls this time around.

 

What metaphorical representation of reptilian-minded inhuman depravity and insanity does this portray?

https://www.youtube.com/watch?v=SbN7QGpeURU

 

Spoiler: in the end the titular construct excretes/morphs into... humanoids.  

It is NOT nature carelessly provoked, nor an obscene display of environmental damage and carnage; a metaphor for great primordial forces erupting in incomprehensible savegery.  

It IS human nature carelessly provoked, and an obscene display of human damage can carnage; a metaphor for great human power erupting in incomprehensible savegery.

Pasadena Phil's picture

I expect that China will continue to prop up these refiners. First of all, they need to process all of those imports that represent payments in-kind in lieu of cash from countries like Venezuela and Nigerian.

Second, since China's own oil production is in permanent decline, they will have to keep importing just to meet their own domestic demand.

Third, refining can be developed into an industry of its own where they export refined product as they are now doing with those in-kind payments. As was reported today at Oilprice.com, there has been a catastrophic collapse of shipping rates for tankers.

http://oilprice.com/Energy/Crude-Oil/Major-Oil-Indicator-Reaches-Lowest-...

Shipping cost is becoming a non-factor in profit calculations. This happened in dry shipping ten years ago and they never recovered because the governments who subsidize the shipping simply refuse to mothball excess capacity. And a few months ago, the Saudis floated the idea of diversifying their trade by going big into oil tankers.

Proving once again why central planning by governments is such a great idea. It keeps private industry from driving up costs with their "excess profits".

jm's picture

The Chinese mandarins will shit these things down. The economics suck, but really it is about pollution.  The peasants are getting sick and it is because oil distillates have poisoned the water table.  That and the lead and other pollutants have made the country a giant cancer ward.

 

Bwana's picture

I used to go to China about 3 times every year for manufacturing mostly in the Shanghai area. I have been there when the smog was so bad you couldn't see across a 4 lane road. Presently every where in the Yellow Sea basin the air is terrible. Their statistics were enough to stop me from traveling to China. I was told 60% of the children twelve and under have permanent breathing problems. The government is between a rock and a hard place because to clean up the air they will have to shut down industry.

just the tip's picture

the advent of the Chinese private refiners as major buyers of crude and exporters of product has been the biggest change in the market since the shale revolution.

and yet another reference to china exporting refined product leaks out through the cracks of MSM.  they are not storing it.  they are processing it.  just like they do with other commodities.  and dumping it on the world market.

also, that is a funny looking refinery.  nothing appears to be a distillation column or heater/treater typ vessel.  looks like a bunch of small storage vessels.  hmm

this is what a teapot will look like.

http://www.nytimes.com/2014/03/04/business/energy-environment/oil-boom-i...