China's crude throughput set to recover in May as product demand, crude stocks rise

China is expected to lift crude oil throughput in the rest of second quarter from a two-year low in April as oil product demand recovers while crude inventory builds, analysts said May 16.

However, high oil product stock levels coupled with scheduled refinery maintenance, limited access to oil product exports and persisting downside risks to demand will cap the rebound, the analysts said.

Faltering domestic fuel consumption amid wider movement controls due to a resurgence in COVID-19 cases and a protracted lockdown in mega city Shanghai forced refineries to cut throughput in April.

China's crude throughput slumped 10.5% year on year and 8.6% from March to 12.66 million b/d in April, National Bureau of Statistics data showed, the lowest since touching 11.81 million b/d in March 2020 following lockdowns due to the initial COVID-19 wave.

S&P Global Commodity Insights had expected China's April crude throughput to reach a two-year low as collected data showed that state-owned refineries operated at 76.4% of capacity in the month, integrated independent refineries at 77% and Shandong-based private plants at 50.1%.

Low throughput also mirrored the 2.9% year-on-year fall in China's industrial production in April as slowing manufacturing activity reduced oil demand. The country's industrial production was last lower by 1.1% in March 2020, following a year-on-year drop of 13.5% over January-February 2020, NBS data showed.

May rebound

"We estimate April should be the bottom [for economic activity], with throughput to rise about 500,000 b/d month on month in May," a Beijing-based analyst said. This view was echoed by several of the analyst's peers.

The COVID-19 outbreak in Shanghai is reportedly gradually coming under control, with a deputy mayor on May 16 announcing plans to resume the city's economic and living activities in three phrases by late June.

Independent refineries in Shandong have lifted throughput since late April as product sales increase amid easing COVID-19 restrictions in the province.

Moreover, the 8.6% month-on-month reduction in throughput has boosted China's crude inventory in April, as the country imported 4.1% more crude barrels in the month than in March, official data showed.

"Refineries have to crack this batch of expensive crude barrels into products to sell to offset cash flow pressure when oil prices remain high," a second Beijing-based analyst said.

The country's crude stocks, including commercial and state reserves, have hit a 10-month high of 924.7 million barrels in May, the highest since touching 925.48 million barrels in July 2021, according to data intelligence firm Kpler, which monitors about 1.5 billion barrels of storage capacity in China.

Recovery cap

However, the throughput recovery in May and June will likely be capped and result in around a 3% quarter-on-quarter reduction for Q2, according to S&P Global Commodity Insights Platts Analytics' monthly report dated May 11.

Platts Analytics estimated that China's oil demand would fall 5% year on year in Q2, and it was uncertain whether the reduction would be compensated by a recovery in the second half of the year if Beijing continues with its dynamic zero-COVID strategy.

With the omicron variant proving highly infectious, China is unlikely to fully relax its pandemic movement controls, which limits oil demand rebound, analysts said.

Meanwhile, China is unlikely to see a second batch of oil product export quotas released in May or even June, preventing refineries from selling oil product barrels overseas.

In addition, S&P Global data shows that around 777,000 b/d of state-owned refining capacity is due to start or end scheduled maintenance in May.