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China Adds to Supply as Refiner Demand Stalls

Copyright © 2021 Energy Intelligence Group

Trading sources say China is releasing more than 20 million barrels of mostly sour crude from its strategic petroleum reserve in what appears to be an attempt by the government to push oil prices lower and control inflation. The move coincides with Opec-plus signing off on a plan to start implementing monthly production increases of 400,000 barrels per day in August, triggering a steep drop in crude prices on Monday (IOD Jul.19'21). A Chinese market player said the government is offering around 4 million tons -- equivalent to around 29.3 million barrels -- of mostly sour crude from its strategic reserve. If all of that oil were released into the market over a single month, it would equate to 946,000 b/d, or more than double the volume that Opec-plus will add to global supply from August. A trader who markets crude to China's independent refiners and two Asian market sources put the government's offering somewhat lower at 3 million tons, equivalent to 22 million barrels (709,000 b/d if spread out over a single month). Independents Lose Their Appetite The release of oil from China's strategic reserves would displace oil that would otherwise be imported and it comes at a time when Chinese independent refiners are already showing a diminished appetite for crude. Additionally, at least one Chinese major is reoffering crude in the market because of the release, further swelling the supply of spot Mideast crude. The net result of all this is likely to be a tougher market for Mideast crude producers, other crude sellers and traders looking to move cargoes. The volumes withdrawn from China's strategic stockpile will only be made available to the country's national oil companies (NOCs). That means they are off limits to Chinese independents and must be processed within China, said two Chinese market players and two Asian market sources. It's unclear whether the NOCs would be allowed to resell the oil to Chinese independent refiners, although that might be possible given that it would remain within the country, said a Chinese market player. China's Crude Imports Dip From a fundamentals point of view, the release of oil from the strategic reserve is likely to further dampen Chinese demand for imported crude, said a Chinese market player and the trader who markets to independents. Before news emerged that Beijing was releasing oil from its strategic stocks, Chinese data showed that crude imports for the first half of this year tumbled by close to 300,000 b/d versus the same period of last year -- breaking the usual pattern of steady growth in China's crude imports (IOD Jul.13'21). Crude volumes arriving at Chinese ports in July are also expected to be low at around 9.84 million b/d, according to Serena Huang of data analytics firm Vortexa. That would represent a plunge of more than 2 million b/d from the 12.13 million b/d that landed in July 2020. And there are no signs of a rebound anytime soon. With the Mideast physical spot crude market now trading September-loading cargoes, Chinese and Asian market sources are seeing muted overall Chinese buying, with demand from independents dropping significantly while the NOCs' buying holds fairly steady (IOD Jun.11'21). And the government is now dropping additional supply into the mix. Big Refiner Skips Monthly Tender Rongsheng -- majority owner of the 800,000 b/d independent Zhejiang refining complex -- is believed to have only enough of its import quota left to take delivery of crude arriving in September, said two market players (IOD Jun.22'21). Because of this, it has not issued its usual tender to buy spot crude this month, most likely because it is close to using up its quota, they added. That represents a major drop in Chinese buying, given that Rongsheng snapped up 8 million barrels of Mideast crude last month, market sources said (PIW Jun.25'21). And with a large quantity of oil from the strategic reserve now poised to enter the NOCs' refining systems, their demand for September-loading spot crude is also likely to tumble. "Chinese demand is going to evaporate," said the trader who markets crude to Chinese independents. Tough September Spot Market One Chinese major has already offered term crude -- ranging from light to heavy Mideast sours -- to some refiners as a result of the release from the strategic reserve, said a market source familiar with the situation. Chinese majors who take crude from the government are likely to resell term and other Mideast crude to other Asian market players, the same market source said. Those sales would likely include grades such as Oman, Qatar Marine, Al-Shaheen (Qatar) and Upper Zakum (Abu Dhabi) as well as Iraq's Basrah Light and Basrah Medium. This would increase the available supply of Mideast crude at a time when Opec-plus is ramping up its production. All in all it is likely to be a "very tough and quiet" September spot market for sellers of Mideast crude and traders looking to resell cargoes, said a Mideast producer source. Freddie Yap, Singapore

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