China's crude runs likely to retreat in Q3 after record highs

China's crude throughput in July took a breather after hitting record highs in the previous month, with analysts saying high oil product inventories, weak refining margins and limited product export quotas could curb runs in the third quarter.

With certain restrictions in place to keep the COVID-19 pandemic under check, S&P Global Platts Analytics expects China's throughput to retreat to about 14.6 million b/d in Q3, from about 14.7 million b/d in Q2.

The third quarter started with an average throughput of 13.96 million b/d in July, falling 6% from the record high of 14.86 million b/d in June, data released by the National Bureau of Statistics showed on Aug. 16. The July volume was down 0.9% from the same month in 2020 and was the first year-on-year fall since March 2020, when the pandemic took a toll on demand.

In the cumulative January-July period, the country's throughput averaged 14.26 million b/d, a 9.4% year-on-year increase.

The independent refining sector led the July reduction in throughput, with private refiners in Shandong cutting throughput by 11.5% from June to 2.28 million b/d, while Zhejiang Petroleum & Chemical shut one of its three 200,000 b/d crude distillation units in the month.

Meanwhile, state-owned refineries also cut their average utilization rate marginally, to 82% in July from 82.4% in June, S&P Global Platts data showed.

"The record high throughput and heavy blending material imports in June and May led to high oil product inventories, which are unlikely to be offset by limited exports in a short term," a Beijing-based analyst said, adding that the recent floods in central China, a typhoon along the coast and COVID-19 infections in some provinces could cap domestic demand.

Coronavirus-related controls

In addition to seasonal floods and typhoon, analysts said Beijing's zero-tolerance policy toward COVID-19 would cast a dark spell on the country's crude throughput.

"It is not impossible that inter-province movement will be restricted during the Mid-Autumn festival holidays in late September and the Golden Week holidays in October. This is not to mention that the flu season starting from November will complicate demand recovery in the north. We will keep tracking the situation," Platts Analytics said in its Spotlight report dated Aug. 13.

May throughput of 14.31 million b/d was the previous record high, while imports of blending materials -- light cycle oil and mixed aromatics -- hit highs in May and June ahead of the introduction of consumption taxes.

At the same time, Chinese oil companies had only 10.71 million mt of oil product export quotas available for the second half of the year to send out their surplus inventories, less than a half of their actual outflows of 26.29 million mt in H1.

Recovery in Q4

Analysts said China's throughput is unlikely to recover until product inventories decline when new capacities are scheduled to come online.

"We anticipate China's runs to rebound by 400,000 b/d in Q4 versus Q3 as incremental volumes from national oil companies' refineries and greenfield/expanded refineries, if fully operational, will more than offset weaknesses in runs from the independent refineries," Platts Analytics said in the Spotlight.

About 800,000 b/d of refining capacity is expected to come onstream in Q4, comprising ZPC's 400,000 b/d phase 2, Shenghong Petrochemical's 320,000 b/d new plant and Sinopec Zhenhai Petrochemical's 80,000 b/d expansion.

Upstream, crude oil output in July fell 2.1% month on month to 3.99 million b/d, falling below the 4 million b/d mark for the first time in 2021, as typhoon In-Fa disrupted offshore production.

Crude output in July still grew 2.5% year on year, taking the volume in January-July to 4.02 million b/d.

China's crude oil output, throughput (million mt)

Source: National Bureau of Statistics