|
Neubauer Coporation Getting your Trinity Audio player ready... |
Refining rates fell to 14.36 million barrels per day in April, the slowest pace since December
The group has reduced oil supplies to stave off surpluses and support prices, and is expected to continue these measures during the second half of the year. But a contraction in Asia’s largest importer could hamper its efforts.
Crude oil prices have fallen by about $10 per barrel in the past six weeks, after China’s pessimistic outlook exacerbated downward pressure on a global market filled with abundant supplies of crude oil in United State and others.
Although the decline in prices is in the interest of consumers and central banks, which suffer from continued inflation, it threatens the revenues of the Saudis and their partners in OPEC+. Riyadh needs prices of approximately $100 per barrel to finance the ambitious plans of Crown Prince Mohammed bin Salman, according to estimates.International Monetary Fund.
Imbalance in China
Henning Gloystein, Head of Climate and Resources at the Eurasia Group, said: China “It is at the heart of weak demand,” and “if these early signs of the emerging imbalance in China continue, OPEC+ will feel pressure to extend supply cuts.”
The Organization of the Petroleum Exporting Countries and its allies plan to hold an online meeting on June 2, where officials expect to agree to extend production cuts by about 2 million barrels per day, as the Chinese slowdown provides greater incentive for perseverance among producers.
China’s strong momentum through 2024 quickly began to fade after faster-than-expected economic growth in the first quarter, underscoring the challenges President Xi Jinping faces as Beijing’s decades-long boom ends.
The Producer Price Index, a measure of manufacturing strength, has been negative for 19 months. The continuing decline in home sales for 11 months led to a reduction in plastic consumption and weakened profit margins for petrochemical products.
There is also limited demand for diesel used in outdoor construction and as a transportation fuel for shipping industrial materials. One measure indicates that apparent consumption of petroleum products in China fell year-on-year in April for the first time since December 2022. As a result, refineries are scaling back their operations.
Refining rates fell to 14.36 million barrels per day in April, the slowest pace since December, and 4% lower than the same time last year, according to Bloomberg calculations based on government data.
Declining oil refining rates
Not only that, smaller Chinese refineries based in Shandong Province, known as “teapots,” have reduced operating rates to about 55% of their production capacity, compared to 62% a year ago, according to Mysteel Oilchem. Their purchases of the main Russian crude, ESPO, fell to the lowest level in three years, according to estimates by data analytics company Kpler.
At the same time, major state-run refineries are reluctant to revive their activity after returning from seasonal maintenance, according to consulting firm Energy Aspects.
Oil flows to the Asian giant were clearly affected. The latest tracking data collected by CNBC showed that the number of giant tankers heading to China decreased to the lowest level in seven weeks. One refinery also reduced its purchases for the month of June after it concluded a long-term contract with Saudi Arabia.
Optimistic oil traders may remain cautious on the commodity if the Asian growth engine appears to be faltering, especially as they were hit by a surprise 10% decline in prices last year.
“The market is getting tighter and tighter, but I question the financial strength of the market amid China’s weak economic situation,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC.
China’s consumption rises
However, OPEC+ officials remain particularly optimistic about oil demand in China and other parts of Asia. Oil consumption in China is set to rise by about 510,000 barrels per day this year, which is equivalent to half the global total, to reach 17 million barrels per day, and then witness another increase in 2025, according to the International Energy Agency in Paris.
Moreover, China’s oil consumption may rise as it takes advantage of lower prices to replenish its reserve stocks. The country added more than 30 million barrels of crude oil to its reserves during the month extending to mid-May, the fastest pace in a year, according to the consulting company Vortexa. These shipments often include shipments from sanctioned countries such as Iran, which trade at a discount to regional benchmarks.
Ed Morse, senior consultant at Hartree Partners, said China has been “very consistent” since 2008 in its policy of bolstering its reserves when prices fall, focusing its efforts on shoring up oil inventories when it can.
However, China’s slowdown bodes poorly for both oil producers and optimistic investors, as this slowdown signals the global market’s transition from scarcity to oversupply.
In other parts of Asia, a sharp decline in diesel production yields has led some refiners – such as Taiwan’s Formosa Petrochemical and others in South Korea – to make slight reductions in operating rates.
While the recovery of flows from the American Gulf to Europe has put pressure on the main markets in the North Sea and the Mediterranean.
Selling shipments from OPEC+ exporters
Many OPEC+ exporters, from Nigeria to Azerbaijan and Kazakhstan, struggled to sell cargoes as quickly as usual amid competition from US exports, causing prices to weaken, according to traders. The recovery in flows from the US Gulf Coast to Europe has put pressure on the main markets in the North Sea and the Mediterranean.
In the United States, which remains the world’s largest oil consumer, crude stocks at the storage center in Cushing, Oklahoma, reached their highest levels since July. Implied consumption numbers show that demand for gasoline is still lower compared to the same period last year, despite expectations of higher consumption when Americans increase their consumption during the driving season during this summer.
“The physical market is still very volatile, and it is difficult for us to adopt a more positive outlook until we see evidence that shipments are starting to unload,” said Brian Leisen, commodities strategist at RBC Capital Markets LLC.
