But what is largely ignored, but shouldn’t be, is the vast quantities of oil flowing into inventories.
China added about 1.32 million barrels per day (bpd) to either commercial or strategic crude stockpiles in August, according to calculations based on official data.
July was the first month in 13 that China turned to stockpiles, and came at a time when imports dropped as crude prices rose during the period when July-arriving cargoes would have been arranged.
This was reversed in August as strong crude imports and steady domestic output outweighed the record refinery processing rates.
China doesn’t disclose the volumes of crude flowing into or out of strategic and commercial stockpiles, but an estimate can be made by deducting the amount of crude processed from the total of crude available from imports and domestic output.
China’s refiners processed 64.69 million metric tons in July, equivalent to 15.23 million bpd, according to data released on Sept. 15 by the National Bureau of Statistics.
This was up 19.6% from the same month in 2022 and also stronger than July’s 14.87 million bpd.
Crude imports were 12.43 million bpd in August, the third-highest daily rate on record, and up 20.9% from July and 30.9% from August last year.
Domestic oil output was 4.11 million bpd in August, which when put together with imports means a total of 16.55 million bpd was available to refiners.
Subtracting processing of 15.23 million bpd leaves a surplus of 1.32 million bpd that flowed into storage tanks.
For the first eight months of the year China added about 810,000 bpd to inventories, or a total of about 197 million barrels.
This means that in theory China could lower imports by about 1.61 million bpd over the final four months of 2023 and still have stockpiles at exactly the same level as they were at the end of 2022.
This doesn’t necessarily mean that China will lower imports in the last four months of the year, what it does mean is that refiners have built up options.
China’s refiners could maintain strong processing rates in order to meet domestic demand and lift exports of refined fuels in order to capture high margins, especially for diesel.
They could do this while lowering imports, which in turn may put some downward pressure on crude oil prices, which hit a 10-month high on Sept. 15.
Global benchmark Brent crude futures reached $94.63 a barrel on Sept. 15, the highest since November last year and up 32% since the low of $71.57 on June 28.
The rally since late June was largely sparked by Saudi Arabia’s decision to voluntarily cut an additional 1 million bpd of production in addition to the reductions agreed by the OPEC+ group, of which the Saudis are the leading exporter.
The question is how will China’s refiners respond to the higher crude oil prices?
History suggests that they tend to pare imports if they take the view that prices have risen too fast or too high.
Conversely, they tend to import more and fill storage tanks when prices are low.
Given that prices started to rally strongly from July onwards if China’s refiners do trim imports, it will likely only show up from September, or more likely October, given the lag between when cargoes are arranged and physically delivered.
There is no guarantee that China will reduce imports in the fourth quarter, especially if refiners can continue to access discounted oil from Iran, Russia and Venezuela.
But there is a risk that they do turn to stockpiles and it’s a risk that the market seems to be largely discounting.
The opinions expressed here are those of the author, a columnist for Reuters.