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The World's Top Oil Market Is Starting to Lose Its Sheen

  • China demand growth seen slowing as space for stockpiles fills
  • Asia’s biggest buyer also seen reining in private refiners

One of the biggest engines soaking up the world’s oil is starting to sputter.

Growth in crude imports by China, the second largest consumer after the U.S., will probably slow by more than 60 percent in 2017, according to a Bloomberg survey of analysts including FGE and Energy Aspects Ltd. Private refiners that helped boost purchases to record levels are expected to be constrained by tighter licenses and increased scrutiny on their taxes. At the same time, the current space available for stockpiles may run out.

While OPEC’s deal to curb output may help erode a glut and lift prices, Chinese imports remain key for any sustained recovery. It’s the biggest buyer in Asia, the world’s top oil market, and its insatiable appetite was a significant driver for crude’s climb to more than $100 a barrel in the past decade.

“China has definitely been a huge bright spot for crude demand this year, but it won’t be as substantial next year,” said Michal Meidan, an analyst with Energy Aspects. She predicts the nation’s imports may increase by 5 percent to 9 percent next year, compared with 11 percent to 14 percent growth in 2016.

Inbound shipments into China in the first 11 months of 2016 rose 14 percent to 7.5 million barrels a day, touching monthly records twice, according to customs data. Next year, though, the Asian nation will boost its purchases by just 4.8 percent compared with 2016, according to the median estimate of eight analysts in the Bloomberg survey.

Brent crude, the benchmark for more than half the world’s oil, traded at $53.48 a barrel on the ICE Futures Europe exchange by 10:53 a.m. in London. Prices were at more than $115 a barrel in mid-2014.

Imports increased as China’s private refiners, known as teapots, started getting licenses to import crude on their own last year in a government push to boost private investment in energy. Previously, the processors relied on state-owned oil majors including PetroChina Co. and Sinopec for supplies.

Import Quotas

The refiners have to adhere to an import quota. As of October, the processors have imported 30 million tons of crude, according to Shanghai-based commodities researcher ICIS-China. A total of 17 of them have been granted a combined 67.05 million tons a year, or 1.35 million barrels a day, in quotas to use overseas oil so far in 2016. A dozen others, seeking a total of 23 million tons in allocations, are still in the process of being approved.

While sellers from Saudi Arabia to London-based BP Plc have been readily supplying the teapots, which account for a third of China’s processing capacity, headwinds loom.

The amount of incremental new quotas allocated for private refiners in 2017 may drop “significantly” from 2016, said Pang Guanglian, deputy secretary general of the China Petroleum and Chemical Industry Federation, an industry group that is among reviewers of the allocations. Some of the teapots are falling behind on their commitment to eliminate outdated units, and a few are trading quotas instead of utilizing them, Pang said last month.

Increased scrutiny over taxes by Chinese authorities could constrain demand from the private refiners. The government has said it will disqualify license applications or revoke import quotas if companies evade tax or falsify documents. Imports may also slow because port and pipeline infrastructure hasn’t developed as fast as oil purchases.

Teapot Challenges

Concern about teapots’ creditworthiness and lack of experience in international trade are challenges, while the implementation of higher fuel-quality standards could force some to shut.

The Chinese government has signaled its intention to slow new quota approvals as it assesses whether the teapots made good on their pledges to close outdated refining units or build storage facilities, according to JPMorgan Chase & Co., which predicts the Asian nation’s oil imports may stop expanding in 2017.

Stockpiling may also slow. In 2016, a lot of China’s imports went into oil storage, said Amy Sun, an analyst with ICIS-China. “Going into next year, due to the slow construction of new capacity and already full tanks in current facilities, there will be limited space for further growth.”

Crude Stockpiling

The nation stocked about 724,000 barrels a day of crude over January to October this year, the highest level for the period since 2004 when Bloomberg first started tracking official data. Bloomberg estimates the pace of China’s stockpiling by subtracting refinery runs from the combined total of net imports and domestic production on a monthly basis to arrive at a surplus crude figure.

China stored a total of 31.97 million tons of oil in its strategic petroleum reserve as of early 2016, equivalent to about 234 million barrels, according to the National Bureau of Statistics. Some of those volumes are under commercial storage facilities. The country built up a total of about 400 million barrels in inventories by mid-2016, compared with a target of 511 million barrels, according to JPMorgan.

“Smaller growth in China’s crude imports will be as a result of slowing stockpiling,” said Sun, who predicts purchases from overseas will grow 6.2 percent in 2017. “Also, weaker growth from independent refiners amid recent government scrutiny will trim demand.”

— With assistance by Sarah Chen, and Jing Yang

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