The recent turnaround in oil market sentiment was to a large extent due to China showing signs of demand recovering back to normalcy. May 2020 witnessed the highest-ever level of crude imports, soaring almost 20% month-on-month to 11.34mbpd. Yet the intense market activity that both China’s state-owned giants and teapot refiners have demonstrated throughout April-May seems to be fizzling out. Amid tankers piling up in front of Chinese ports buying interest has significantly weakened in June and July, implying that the spring purchase frenzy was primarily driven by unprecedentedly low crude prices and it will take several months until China’s refineries can fully digest the barrels in stock. Taking a rather straightforward look at main sources of Chinese imports we shall see that a weaker summer buying season seems almost unavoidable.
1. West Africa is Going Down
If one is to look at exports from W-African countries to China in terms of their loading date (see Graph 1), there would be relatively little ground to expect any significant decline. The overall volumes have bounced back to their pre-corona level, moreover Chinese buyers have grown some appetite for Nigerian crudes which were purchased only sporadically before 2020. What is more, this June will hit the highest-ever West African arrivals to China with 58 million barrels coming in across more than 80 cargoes (the sailing time is roughly 40-45 days). Yet future purchases will be substantially complicated by the massive queue of tankers outside Shandong and Tianjin – at least 12 WAF-containing vessels are awaiting discharge for several weeks already.
2. Russian Seaborne is Going Down
Source: Thomson Reuters.
Setting up a new all-time high again, Russian seaborne exports to China have climbed to 1.15mbpd this May, with Chinese refiners taking in vast amounts from Pacific, Mediterranean and even Baltics ports. China-bound vessels from the Baltics have in fact become the top destination in April with roughly 25% of all barrels moving to China. For this to happen, traders like Unipec would charter VLCCs that collect smaller cargoes around the Danish port of Skaw and travel almost 2 months to Shandong and Tianjin. After the purchase frenzy, Urals exports from the Baltics have evaporated (only one cargo in June) and Russia’s seaborne trade with China went back into its traditional mode of consisting predominantly of ESPO.
3. North Sea is Going Down
Source: Thomson Reuters.
Chinese buyers have grown to like North Sea crudes throughout the first half of this year as the Brent-Dubai EFS has moved into slight discounts compared to multi-dollar per barrel premiums historically. State and private refiners alike continued to buy Atlantic grades when freight rates peaked in February-March and have peaked in April (at 0.56mbpd) with Forties and Johan Sverdrup being the two most coveted grades. This means that in terms of arrivals, June 2020 will be the highest month on record with 19.5 million barrels of crude arriving across a dozen vessels. The Norwegian Johan Sverdrup is a noteworthy addition to the Chinese refining system since almost 60% of the field’s output has ended up in the first six months of this year. June loadings from the UK and Norway have dipped almost 25% month-on-month as the Brent-Dubai EFS moved back into premia.
4. Latin America is Going Down
Source: Thomson Reuters.
In contrast to all above mentioned categories China’s imports of Latin American crudes were on par with those of today in terms of overall volumes – Chinese refiners bought on average 30-40 million barrels per month, splitting the incoming volumes between Venezuela, Brazil, Colombia and Ecuador. As the United States tightened the sanctions screw around the Maduro regime, it became much more difficult for Chinese refiners to buy crude from the Orinoco area (although not impossible) and the overall slate of what China brings in from Latin America has tilted towards Brazil. Thus, when China-destined loadings reached a 13-month high in May at 1.32mbpd, there was no surprise in Brazilian grades such as Lula (a new crude grade being displaced on the Oilprice.com oil prices page) making up more than 80% of the total. Although Brazilian crudes retain a noticeable presence on the Chinese market, aggregate Latin American exports to China have dropped below 1mbpd after May.
5. Southeast Asia is Going Down
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Source: Thomson Reuters.
For much of the 2010s South East Asian nations played a relatively minor role in China’s crude supply, the occasional Vietnamese or Malaysian cargoes reached Chinese refiners but their share of the total always stayed firmly in the single digits. But in the last 12 months the importance of South East Asia for the Chinese market increased as Malaysia and Indonesia became prime spots for ship-to-ship transfers. Oftentimes these parcels would have no direct bearing to the South East Asian region – a large part of Venezuelan deliveries to China recently went through Malaysia and without a thorough scrutiny might be even perceived as intra-regional. After a peak around March-April 2020, the STS activity in the region of South East Asia seems to abate and the volume of crudes departing for China in June (0.58mbpd) is more than a third lower than the March peak.
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By Viktor Katona for Oilprice.com
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