Chinese stockpiling behind crude price gains

If you are looking for an explanation as to why crude oil prices in Asia aren’t lower, then the blame rests squarely with Chinese stockpiling.

China’s record imports of 6.78 million barrels per day (bpd) in April give the impression that oil demand is roaring ahead, but the reality is that almost half a million bpd is being put into storage tanks.

The authorities don’t officially disclose when strategic inventories are being built, but shipping and other data suggest that new facilities at Tianjin and Huangdao have started operations.

Over the first four months of 2014, Chinese crude imports have averaged 6.24 million bpd, a gain of about 11.5 percent.

In the first quarter domestic oil output was about 4.16 million bpd.

Assuming domestic output was roughly stable in April, this means that over the first four months of the year the amount of oil available in China was about 10.4 million bpd.

However, implied oil demand, which is calculated by taking refinery throughput and adding in net imports of refined fuels, was 9.96 million bpd in the first quarter, a drop of 0.6 percent from the same period in 2013.

Assuming implied demand was steady in April, this means that the gap between crude available and that consumed was about 440,000 bpd.

It’s this amount of oil that has likely found its way into storage tanks.

However, not all of it has been flowing into strategic storage, with two new refineries starting up, with a combined capacity of 440,000 bpd.

Given that refineries operate on about 21 days of inventory, this implies that about 9.2 million barrels of crude was needed to fully stock the new plants.

Assuming this was built up in the first four months of the year, the commercial stockbuilding may have accounted for 77,000 bpd of imports.

This still leaves about 363,000 bpd of crude that is likely to have flowed into strategic stockpiles.

This implies a total of about 43.5 million barrels over the first four months of the year.

China may fill a total of 58 million barrels of strategic stockpiles this year, Barclays said in a research note on May 8.

While the calculations above aren’t definitive, they do imply that China has gone some way toward meeting its strategic stockpiling needs for this year.

However, it also does imply that there are still some 15 million barrels of oil still to go into tanks, which may help keep China’s crude imports robust in the next few months.

China is the main reason that crude flows to Asia are showing any growth so far in 2014.

The region has imported about 325.2 million tonnes of crude in the first four months of 2014, little changed from the 324.4 million tonnes over the same period last year, according to data compiled by Thomson Reuters Oil Analytics.

Total flows into Chinese commercial and strategic tanks may account for as much as 7.2 million tonnes of crude over the first four months of 2014, meaning that without this buying, Asian crude demand may have actually dropped by around 1.9 percent.

If this had been the case, it would be reasonable to expect crude prices would have come under pressure, especially given rising supply from major Middle East producers Iraq and Iran.

Instead, benchmark Oman futures traded in Dubai fell 3.9 percent from the start of the year to the close on May 9.

While this is a slightly bigger drop than the 2.6 percent for global benchmark Brent futures, it’s likely that the European crude has been boosted by tensions in Ukraine and ongoing supply disruptions from Libya, which mainly produces a light oil similar to Brent.

The implication from Chinese stockpiling is that this has boosted demand enough to prevent prices for crude to Asia from weakening in line with softer actual consumption in the region.-Reuters