(The opinions expressed here are those of the author, a columnist for Reuters)
LAUNCESTON, Australia - Chinese refiners dipped into crude oil inventories in April for the first time in 18 months, as high processing rates exceeded the volume of crude available from both imports and domestic output.
Refiners processed 61.1 million tonnes in April, equivalent to 14.87 million barrels per day (bpd), which was the second-highest on record and followed on from the all-time peak of 14.9 million bpd in March.
The volume of crude available to refiners from imports and domestic output in April was 59.71 million tonnes, equivalent to 14.53 million bpd.
China doesn't disclose the volumes of crude flowing into or out of strategic and commercial stockpiles, but an estimate can be made by deducting the amount of crude processed from the total of crude available from imports and domestic output.
For April, the total amount of crude available was 340,000 bpd below the volume processed by refiners, the first time since November 2021 that refiners have drawn on inventories.
For the first quarter of 2023 China added about 770,000 bpd to either commercial or strategic storages, a rate that dropped to 480,000 bpd for the first four months as a result of the draw on inventories in April.
The question for the oil market is whether China dipping into stockpiles is the start of a new trend, or whether is was just a one-off driven by temporary factors.
On the processing side, it's clear that China's refiners are running their plants harder, to take advantage of rising domestic demand for fuels as the economy reopens from its COVID-19 lockdowns.
Refiners have also boosted exports of refined fuels having been granted additional quotas by the government as Beijing sought quick ways to boost economic growth and refiners saw opportunities to profit from strong margins for products in the first quarter, especially diesel.
While the domestic demand story remains largely intact, the high levels of product exports may start to taper in coming months for several reasons.
Refiners are likely to hold off exports in order to meet domestic needs, profit margins on refined fuels in Asia have fallen sharply in recent weeks, and Beijing's second round of export quotas are less than half of the first allocation.
Overall, the outlook for refining volumes in China remains strong, with the domestic market recovering and product exports likely to remain solid, even if below the huge volumes seen in the first quarter, when shipments jumped 59.8% from the same period in 2022.
CRUDE IMPORTS RECOVER
On the crude import side the picture is more interesting, with April arrivals the lowest since January at 10.3 million bpd.
This may have been a temporary factor as refiners sought less crude as they entered the traditional maintenance period, but it also could be a reflection that China's economic recovery has been uneven.
While consumer spending and travel have boosted fuel consumption, softer manufacturing and a still sluggish construction sector have weighed on demand for diesel.
Then there is the matter of prices, with China's refiners having shown in the past that if they take the view that crude has risen too high, or at too fast a pace, they are prepared to import less and dip into stockpiles.
Conversely, when crude prices drop, Chinese refiners have bought in excess of requirements, such as during the early stages of the COVID-19 pandemic when oil slumped to multi-decade lows.
Another factor to take into account is the lag between when crude is purchased and when it is physically delivered, a process that can be as long as three months.
The surprise additional 1.16 million bpd output cut announced by the OPEC+ group of exporters at the beginning of April did result in a brief spike higher in the global benchmark Brent futures, which reached $87.49 a barrel on April 12.
However, the price has since fallen back to close at $75.86 a barrel, which is below the level of just under $80 when OPEC+ made its new production cut.
The brief price spike may have resulted in Chinese refiners holding back on some oil purchases at the time, but this will likely only show up in imports in June and July.
For May, it seems likely that imports will recover, with Refinitiv Oil Research estimating arrivals of 11.83 million bpd, a jump of 1.53 million bpd from April's soft outcome.
The end of refinery maintenance and expectations of strong economic growth are the likely drivers of May's higher imports.
The opinions expressed here are those of the author, a columnist for Reuters.
(By Clyde Russell; Editing by Christopher Cushing)