China’s Opaque Oil Data Leaves Markets In The Dark

China saw its first-half crude imports drop year over year for the first time in a first half in eight years, sparking concerns in the market that purchases from the world’s largest oil importer may not be too supportive for oil in the coming months.  At the same time, Chinese fuel exports have been rising this past half-year due to record refinery run rates amid a glut of refined oil products. 

In recent months, Chinese refiners have been processing more crude than the apparent availability, calculated as the sum of imports and domestic production, estimates by Reuters columnist Clyde Russell based on Chinese data show. 

On the face of it, based on a simplified crude availability/product exports estimate, it would appear that China is consuming domestically less crude oil than before, according to Russell. 

Analysts, who are watching closely the imports and estimated consumption trends in the world’s largest crude oil importer, are looking for clues about Chinese demand and purchases, which could, at times, be the single largest driver of oil prices. 

Since China doesn’t report crude inventories in either commercial or strategic petroleum reserves, the analysts’ job is a complicated one and involves a lot of assumptions and ‘what ifs’. 

Despite the uncertainty about how much crude oil China really consumes these days, one thing is clear: recent customs data out of China is giving the market some mixed signals, possibly tilted to the bearish side.  

But there are two key reasons why Chinese crude oil imports fell in the first half for the first time since 2013. These are the significantly higher crude prices this year, compared to the Q2 2020 lows, and a crackdown on illicit fuel trade and tax avoidance or tax evasion from the private refiners, commonly known as teapots.  

China’s crude oil imports fell to some 9.77 million barrels per day (bpd) in June 2021, down 2 percent in May and the lowest monthly level since the start of the year, according to customs data cited by Reuters. Over the first half of the year, China imported 260.66 million tons of crude, or 10.51 million bpd per Reuters estimates. This was a 3 percent drop compared to the first half of 2020. The first-half figure was boosted by increased imports by independent refiners. Since the first quarter, however, Beijing has begun cracking down on the teapots, as production of fuels both at independent refiners and state-owned majors was rising faster than demand, undermining refining margins and creating a glut.

In addition, China has been increasing the oversight on the refining industry in order to crack down on the illicit fuel trade, close loopholes that some companies have been using to avoid paying fuel consumption taxes, and curb the fuel oversupply, part of which is the result of tax avoidance or tax evasion.

At the same time, Chinese refiners processed a record amount of crude oil in June, at 14.8 million bpd, up by 3.9 percent from May when run rates also broke records, statistics data showed. The average daily run rates for the first half of the year were even higher, at 15.13 million barrels—up by 10.7 percent from a year earlier, the data also showed.

The record run rates are higher than the implied availability of crude in China as calculated by imports plus domestic production, Reuters’ Russell notes. 

This suggests that refiners have been drawing down from inventories in recent months. They may likely prefer tapping into the (unknown) crude inventories stockpiled at ultra-low prices last year than paying in excess of $70 per barrel for oil for more imports now. 

Going forward, the Chinese imports could cool down further if refiners continue to tap inventories than boost crude purchases at $70-plus oil. 

Independent refiners are expected to curb crude imports in the second half of 2021 after China slashed by 35 percent the import quotas for the teapots in the second batch of oil buying authorizations this year. The significantly lower quotas suggest that private Chinese refiners could import much lower volumes in the second half of the year compared to last year and to recent months.  

China’s opaque crude inventory data leads to a lot of speculation about how much the world’s top oil importer has stocked up in inventories and how it would act on the market with prices now more than double the average Brent price of just below $30 a barrel during the second quarter of 2020.