One of the bright spots of demand for oil in recent months has been China, where teapot refineries have been firing on all fours following the recent loosening of import restrictions, leading to a buying scramble of offshore oil (courtesy of the recent massive credit injection by the PBOC) which among other things has resulted in an unprecedented glut of gasoline. That is no longer the case.
According to Bloomberg, oil imports by China, the world’s biggest consumer after the U.S., fell to a four-month low in part due to congestion at one of its biggest ports curbed purchases from independent refiners. Inbound shipments in May totaled 32.24 million metric tons, data from the Beijing-based General Administration of Customs showed on Wednesday. That’s equivalent to 7.62 million barrels a day , down 4.3 percent from the previous month, and the lowest since January. Net oil-product exports fell by almost one-third from April to 810,000 tons.
This validates what we noted two months ago when we looked at the unprecedented glut of full tankers lying in wait in places like the Persian Gulf and the Straits of Malacca, waiting for higher prices to make landfall. As we noted then, "It's not just the Persian Gulf though: shocking sights can be seen in in Asia, where many ports have not been upgraded in time to deal with ravenous demand as consumers take advantage of cheap fuel. "It's the worst I've seen at Qingdao," said a tanker captain waiting to offload at the world's seventh busiest port, adding that his crew was killing time doing maintenance work. "
This has now been confirmed.
According to Bloomberg, "Qingdao port in Shandong province, where most teapots are based, has been congested this year from “unprecedented” tanker traffic, according to Liu Jin, general manager of Qingdao Shihua Crude Oil Terminal Co., which operates oil berths at the port."
“The congestion at the Qingdao port is highlighting the need to slow the pace of buying,” Michal Meidan, an Asia energy analyst at Energy Aspects Ltd., said by e-mail. “Prices have gone up, so teapots will use this to take stock of their buying patterns thus far.”
It wasn't just congestion however. As UPI notes, oil demand in China, a leading global economy, contracted for the third straight month in part because of economic slowdown, data analysis found. "Analysts with the World Bank downgraded the forecast for global economic growth for the year from 2.9 percent to 2.4 percent. India's economy grows by 7.6 percent, while Brazil and Russia sink deeper into recession. For China, the World Bank said the economy expands this year by 6.7 percent, compared with 6.9 percent last year. "In an environment of anemic growth, the global economy faces mounting risks, including a further slowdown in major emerging markets," the World Bank said."
It gets worse; according to an analysis from S&P Global Platts finds China's apparent oil demand, a measure of domestic production plus net imports, shrank 1.3 percent year-on-year in April. "China's oil demand growth is expected to moderate significantly in 2016 as gross domestic product growth slows on the back of economic rebalancing," the emailed report found.
Ignoring the question of macro growth and focusing on just local refineries, Bloomberg adds that China’s refineries processed a record 44.75 million tons of crude in April, while output from its domestic fields slumped to the lowest in 14 months, data from the National Bureau of Statistics showed last month. Total exports fell 4.1 percent in dollar terms in May from a year earlier, the customs administration said Wednesday.
However, as we also showed before, it may not be just port congestion. As we showed last week, Chinese gasoline exports are also up more than 50 percent for the first four months of the year, suggesting there is nowhere near enough local demand for all the refined product.
As a result Reuters said that going forward China could scale back its volumes. "Maintenance in May and June, particularly at (Chinese) teapot refiners will ... lower gasoline output," analysts at BMI Research said in a note to clients this week.
What this means is that now that China is fully glutted with both raw and refined product, expect Chinese demand to suddenly drop, something which the latest import data are already showing. Unless of course, the government decides to ram refinery production, and alongside the coal and steel industry, to force the production of gasoline well above implied demand, something which as the chart above shows is already taking place.
Assuming some production rationality, however, especially if oil prices continue to rise, and should the supply disruptions get resolved (especially the ongoing situation in Nigeria where the Niger Delta Avengers continue to impair production on a daily basis virtually and mysteriously unopposed), the market is setting itself up for another rerun of the summer of 2015, when prices rose and flatlined for most of the summer, only to tumble into the end of the year.