China’s oil demand could be overestimated

Strong demand for oil in Asia has supported bullish sentiment in the oil market in recent weeks, but rising oil prices could dampen crude purchases from the world’s largest oil-importing region.

Oil imports from Asia, and particularly China, have been strong since the start of the year. But signs have already emerged that no crude buying spree will take place in the second quarter, with oil prices exceeding $ 60 chipping away at refining margins and scheduled maintenance at Chinese refineries starting in March and April.

The rally in the oil futures market and investor optimism in the paper market is currently stronger than the actual crude oil market and cargo prices to China and other countries in Asia, according to Reuters columnist Clyde Russell. Remarks.

Chinese imports could slow in second quarter

To be sure, the world’s largest oil importer, China, significantly increased its crude imports in January 2021 compared to late 2020, thanks to heavy purchases from independent refiners who have started using their allocated import quotas for 2021. So-called teapots, which account for about a fifth of total Chinese imports, had slowed by the end of 2020 as many refiners had already exhausted their quotas earlier in the year, taking advantage of the lowest prices in years for s’ supply crude at low prices.

Strong imports in January 2021 helped support global demand for oil at a time when lockdowns in Europe – and some cities in China – weighed on the market.

However, the crude oil that China imported in January was bought in October and November, when oil prices were somewhere in the $ 40 range.

With Brent Crude now regularly flirting with the $ 65 mark, buying appetite has slowed, not only in China but also in India. These two markets have generally been the main drivers of demand growth in recent years.

In addition, Chinese refiners are expected to begin spring maintenance scheduled for this month and next year, which could further dampen crude purchases from the world’s largest oil importer in the second quarter.

“Demand is very slow now and there are many available cargoes to choose from,” said a source at a Chinese refinery. Reuters Last week.

China is also said to be on the verge of reaching its storage capacity limits, and it would make no sense to fill it to capacity with over $ 60 worth of oil when it embarked on a buying spree. at $ 20-30 worth of oil last spring.

India unhappy with rising oil prices

India, the world’s third-largest oil importer, which depends on imports for around 80% of its oil consumption, is also worried about rising oil prices in recent weeks, which is pushing up its oil import bill. and domestic inflation.

Earlier this week, India again called on the OPEC + group to increase production from April, saying it did not support “artificial cuts to keep the price up.”

As oil prices hit their highest level in 13 months, India began calling on OPEC + in January to examine the effects of rising oil prices on consumption in recovering economies.

Strong Asian demand or investors looking for high returns?

Oil demand from major Asian importers is certainly above the lows at the start of the pandemic, but “resilient Asian demand” is certainly not the only driver of oil futures prices these days.

Many industry officials, from the OPEC General Secretary Mohamed barkindo to the largest oil company in the world, Saudi Aramco, tout this “resilient demand in Asia”.

Asian demand is improving, but the recovery in the paper market may be masking the slowdown in physical demand right now.

The tightening of oil supply and the expectation of much stronger demand later this year have steepened the curve of the offsetting oil futures contracts, the state of the market where the prices of the closest contracts are higher than those more distant in time. Related: Is $ 3 Gasoline Coming?

With the futures curve with declining prices, investors who are long on oil get a positive rolling yield when it comes time to renew the contract they are holding. At that point, they must sell the higher priced contract and replace that position with the next lower priced contract, creating a positive rolling return. And the greater the offset, the higher the efficiency of the roller.

“An increased offset in the oil market where the spot price is trading at the top of the curve, reflecting a tightening of the market, has seen the return of passive long holding increase by nearly 10% on an annualized basis and close to the most favorable. conditions that the market has been able to offer investors over the past decade, ”wrote Ole Hansen, head of commodities strategy at Saxo Bank, in a remark Wednesday.

Add to that the growing appeal of oil futures as a hedge against inflation, and we have investors and speculators fueling a rally in the paper market that isn’t necessarily indicative of actual demand for physical crude oil.

Rising oil prices and upkeep of refineries could lead to a slowdown in Chinese imports in the coming months, and the market currently focused on “when oil hits $ 70” might realize that real demand for oil is in the process. China might not be as strong as oil futures suggest.

By Tsvetana Paraskova for OilUSD

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Felix J. Dixon