Bear in a China Shop

The storm battering Chinese crude demand is fast becoming a hurricane. Several factors are contributing to the deteriorating outlook. They include the spread of the Covid-19 Delta variant, newly slashed oil product export quotas, a release of crude from the strategic petroleum reserves, and independent refiners running out of crude import quotas (PIW Jun.25'21). The situation in the world's most important oil market makes it hard for benchmark Brent futures to rally to $80 per barrel, with Brent now closer to $70/bbl. Spot markets have already felt the effects, which could spread across the crude complex -- a huge Chinese refinery is believed to be cutting its term volumes of Mideast crude. China’s decision to release up to around 4 million tons (29.3 million barrels) of strategic petroleum reserve oil, has already rattled the September-loading Mideast spot market (PIW Jul.23'21). The timing of the release will help determine how much crude floods the market. A Northeast Asian refiner source believes it will mainly occur in August, which would equal up to 945,000 barrels per day. A Chinese source believes it will be an August/September timeline, which would drop it to roughly 480,000 b/d. Regardless, it has sapped crude demand from China’s majors, including Unipec, the trading arm of China’s largest refiner Sinopec. Unipec is thought to have significantly reduced its spot market purchases of September-loading Mideast crude, largely because of the strategic petroleum reserve oil it received, sources said. It had earlier been reoffering some of its crude, partly to help cope with the strategic petroleum reserve release, sources said. These might include deals where it sold medium, sour Upper Zakum barrels to Taiwanese refiner CPC, light, sour Qatar Land crude to Thai refiner PTT, and light, sour Murban to Rongsheng, the majority shareholder of China’s 800,000 b/d Zhejiang Petrochemical refining complex. The cargoes mostly load in September. Already, the spot market for key Russian East Siberia-Pacific Ocean (Espo), which is heavily dependent on Chinese demand, has taken a hit. September-loading Espo sold at premiums ranging from $2.20/bbl to around $2.90/bbl to the Dubai price benchmark, down roughly $1/bbl from the previous month. Rongsheng is likely to have run out of crude import quotas, and is believed to be taking lower Mideast term crude, said market sources (PIW Jun.25'21). There is talk that Rongsheng slashed Mideast term volumes by 20%-30%, a Chinese source added. Rongsheng is believed to have term contracts for Saudi, Kuwaiti, Abu Dhabi and Iraqi crudes. On Aug. 12, the refiner received new crude import quotas of 3 million tons, which could affect future term liftings and spot buying. Meanwhile, a fresh Covid-19 outbreak is forcing new lockdowns in China, slamming product demand. Beijing also slashed key product export quotas, with cumulative totals down by about one-third compared with the same period last year, compounding problems for refiners (IOD Aug.10'21). With lockdowns hurting domestic demand, and less leeway for refiners to export excess products, some Chinese refiners are cutting runs by 5%-10%. Some teapot refiners are even considering suspending operations, sources said. Because of this, some Chinese majors might have reduced their recent nominations for September-loading Saudi and Kuwaiti term crude, said a Chinese market player.