Decline in Chinese crude oil production
According to CR Weber, “Chinese crude oil production has dropped sharply in 2016 from 4.25million b/d in December 2015 to 3.8million b/d in October, which was a seven‐year low. It recovered to 3.93million b/d in November but we are presently anticipating an estimated number of around 2,437,000 tons of domestic crude exports for China for 2016, down 77% from their 2000 exports. Aging oil fields and a low oil prices were an important factor undermining crude oil production in 2016, but we anticipate the decline to continue – with output set to fall to 3.5million b/d by 2020”.
Revival of refinery throughputs led by teapot refineries
The shipbroker added that the “rise of the independent teapot refinery has been a market‐transforming phenomenon in 2016, emerging as a brand new source of crude oil demand growth. This group of refineries accounts for about 30% of total present Chinese refinery capacity (14.4million b/d). Traditionally teapots were required to purchase crude oil from state petrochemical companies. In September 2015, seven teapot refiners received their own import licenses. More licenses followed pushing total teapot quotas to 1.26million b/d at the end of 2016. Teapots are expected to add between 200‐400,000 b/d to Chinese crude oil import demand growth in 2017, if – as seems likely ‐ quota levels for the next year are maintained at end 2016 levels. Some estimates suggest that Chinese crude oil import demand will increase by 500‐700,000 b/d next year”.
Drive to add to strategic crude oil reserves
CR Weber also noted that “since 2008, when China completed building its first phase strategic crude oil infrastructure, stockpiling has been a very important part of Chinese crude oil import demand growth. However, this source of demand doesn’t always hit the headlines because of uncertainty about the exact size of current Chinese reserve capacity and a market perception that it is close to its maximum ceiling. This uncertainty has generated attention in recent months because of the disparity between government statements about stock levels and increasingly sophisticated independent stock measurements made by market observers using AIS tracking and satellite imagery.
Under the latest five‐year plan 2015‐2020, China’s government is targeting combined government (SPR, 476 million barrels) and commercial reserves (209 million barrels) to reach the equivalent of 90 days (685 million barrels) of emergency cover i.e. cover sufficient to replace its net import requirement”.
“However, there are suggestions from Orbital Insight and others that the storage building program may already even exceed this target, in part because of the identification of possible additional storage sites – including underground caverns by the Yellow Sea and a scattering of islands in the Yangtze River delta. As a result, we think that China’s strategic stockpiling is still not completed and will continue to be an important source of crude oil demand growth – at least while oil prices remain relatively low”, CR Weber concluded