Is China's reduced oil import strategy revealing weaker underlying demand?
Core argument: China’s crude import reduction, despite rising commercial stockpiles, drives oil market rebalancing through refined product export bans that lower refinery.
Over recent weeks, industry executives have noticed something odd: Chinese state-owned oil companies have been reselling some of their oil cargoes to European and Asian rivals. The behavior suggests surpluses — odd during a supply shortage. The shift has not only capped benchmark oil prices, but also helped to trigger a collapse in the premia that traders pay above them to secure physical crude. Barrels that in early April went for $30 above benchmark prices are now changing hands at premiums as low as $1. Talk of discounts has even started to emerge. The import drop might make sense if Chinese commercial inventories were falling sharply, or if Beijing had tapped its strategic petroleum reserves. But neither is happening. Instead, commercial stockpiles have continued to increase in recent weeks, according to satellite data. What Beijing did was ban exports of refined products, effectively allowing refineries to process less crude to meet domestic demand. But the policy has now been reversed, suggesting the country sees enough fuel availability. Make no mistake, China is rebalancing the oil market today. The bigger question is for tomorrow: If the country can reduce imports so drastically without, apparently, having to take extreme measures, what does that say about the future of oil consumption there? Nothing positive for the bulls, certainly.