China's crude oil imports in the first half of 2021 declined for the first time in eight years, pulled down by sharp year-on-year falls in inflows in May and June, as a steep increase in international oil prices prompted importers in Asia's biggest oil consumer to defer purchases and dip into domestic inventories instead.
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But analysts and industry officials expect China's oil imports in the second half of the year to recover and bring overall growth for the year, amid expectations that the anticipated commissioning of new refining capacity would create incremental demand. In addition, global oil prices could cool if oil producers decide to boost output and Iranian supplies return to the market.
"While stocks are currently being drawn, refiners would start building those stocks in subsequent months given requirements from new refineries. This could push inflows in Q4 to a historical high and lift the country's crude imports," said Grace Lee, senior analyst with S&P Global Platts Analytics, adding that this could push up China's overall imports in 2021 by 1% year on year to 11 million b/d.
But before that happens, rising crude prices will narrow the domestic refining margin and keep buying interest somewhat subdued in the third quarter.
Up to 840,000 b/d of new capacities with state-run Sinopec, and privately held Zhejiang Petrochemical and possibly even Shenghong Petrochemical could start trial runs later this year, which will necessitate additional buying, according to Platts Analytics.
The country's crude inflows in the first half of the year fell 2.5% year on year to 10.56 million b/d, the first half-year decline in crude imports China has seen since 2013, data released July 13 by the General Administration of Customs showed.
This was the result of sharp year-on-year falls in June and May, with inflows falling 24.5% and 14.5%, respectively, GAC data showed.
In addition to destocking activity amid high crude prices, there was even limited availability of crude import quotas. Also, the high level of imports in H1 2020 meant the numbers for H1 2021 look much lower, analysts said.
Inventories at 14-month lows
According to data intelligence firm Kpler, China's crude inventories fell to a 14-month low of 879.46 million barrels in June.
S&P Global Platts data showed that crude imports for independent refineries slumped 31% year on year to 2.99 million b/d in June, accounting for about 42% of the year-on-year reduction in China's total crude imports.
This suggested that the independent sector, which accounts for about 30% of China's refining capacity, had a deeper import cut than their state-owned peers.
Last year, Chinese oil companies took advantage of the crude oil price slump and rushed to bring in as many cargoes as possible, lifting imports to a historical high of 12.99 million b/d in June 2020.
According China's pricing mechanism, the retail gasoline and gasoil price ceilings will reflect low margins when international crude prices surpass $80/b, compared with profit levels when crude prices are between $40/b and 80/b.
ICE Brent has been largely hovering above $75/b since July 9. Platts Analytics expects Dated Brent prices to average around $77/b this month before easing toward $66/b by the end of the year.
"If benchmark crude futures prices exceed $80/b, we may see even slower buying from the independent sector, which is even more price sensitive than its state-run peers," a Beijing-based analyst said.
State-owned refineries are expected to be the main driving force behind an expected increase in China's crude imports in the second half of the year as import volumes by the relatively smaller independent refineries are set to slow amid limited quota availability, tighter government controls and higher tax costs.
Meanwhile, China's crude appetite will see limited impact from the changes to international trade in oil products, since the downside of cutting oil product exports will be offset by fewer imports of oil product blending stocks, analysts said.
China's oil product exports are set to drop from the 6.44 million mt seen in June, and unlikely to see any significant growth in the second half of the year, with Beijing expected to significantly cut export quota allocations.
The 66.1% year-on-year jump in June exports not only resulted in an 8% growth in the first half of the year, but also made less quota available for the rest of the year, with PetroChina having to skip cargo exports in July as it has almost used up its quota.
At the same time, on June 12 Beijing imposed heavy consumption taxes on imported light cycle oil and mixed aromatics, which block the access for the blend stocks inflow.
As a result, China is expected to keep almost all of it oil products at home in the second half of the year to meet demand during the peak autumn season.
China's preliminary trade data:
Source: General Administration of Customs