Crude oil imports into Asia jumped in September. Normally such news would spark hope for demand and, consequently, prices, but this time it’s more complicated. And it has less to do with Asian demand than demand in Europe.
Oil imports in Asia rose by more than 2 million barrels daily last month, Reuters’ Clyde Russell reported in his latest column, noting that the bulk went to China and Singapore.
He then went on to point out that both China and Singapore had gone through refinery maintenance in August and utilization rates were up in September. On the one hand, it’s the normal preparation for winter. On the other, the EU has an embargo on Russian crude coming into effect in less than two months. And another one, on fuels, kicking in two months after that.
Europe is already grappling with a diesel shortage as it shuns Russian fuels ahead of the embargo and as the global supply of the fuel remains limited. This has contributed to fears of demand destruction by excessive prices, but it has also reinforced fears of a recession due to the fuel crunch.
The U.S. could maybe increase its fuel shipments to Europe, according to executives from major commodity trading houses quoted in a recent report by Energy Intelligence, especially since Russian fuels will be rerouted to other destinations, including Asia and South America, satisfying some of the demand there. And some of these Russian fuels will go to Europe but come from China.
It is a somewhat ironic twist in the Europe-Russia story that Russian oil will not literally stop flowing into Europe, whatever Europe does to stop that flow, even if it will pay a literally steep price for it. As already evidenced by fuel flows from India to Europe, the latter has no problem with Russian refined products as long as they don’t come from Russia itself.
This will likely continue happening because whatever geopolitical games are being played, physical demand for oil products is likely to remain robust until prices become prohibitive. Even then, demand destruction will not happen overnight. A case in point is France, where strikes have paralyzed more than half of the country’s refining capacity, and yet people are queuing to fill up their tanks.
It is a double irony that the European Union might need to rely on China for its winter fuel supplies. After all, following the example of the U.S., the EU has also spoken against China’s rising domination of various global markets. It is not seen as a friend in Europe. Yet it is a vital supplier of commodities without which the EU will collapse.
What’s more, European countries might need to tap that lifeline sooner rather than later. Because the refiners’ strikes in France are not the only challenge for supply. In fact, this month will see the diesel shortage in Europe worsen as refineries enter into seasonal maintenance. This will take 1.5 million bpd in refining capacity off the market. Added to the French strikes, with no immediate end in sight, the diesel supply situation in the EU becomes quite tense, with limited fuel availability elsewhere as well. Except, that is, in China, by the look of it.
Bloomberg noted in a recent report that Chinese refiners had just been granted the biggest fuel export quotas since the start of the year. One reason for this is the still-floundering local demand growth after all the lockdowns. The other possible reason is the prospect of greater fuel demand in Europe for the abovementioned reasons.
“As long as the Chinese economy remains weak and product stocks are high, there are incentives for refiners to de-stock and export,” one researcher from the Oxford Institute of Energy Studies told Bloomberg.
It’s time for Europe to start hoping China’s economy remains weak.
By Irina Slav for Oilprice.com
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