Chinese oil imports pick up in October, but problems remain

In this update, we take a look at the latest developments around Chinese oil demand and what to expect heading into the end of the year.

Summary:

• Chinese domestic clean product demand growth slowed considerably in Q3, managing a gain of just 210 kbd y/y, far below the 610 kbd y/y gain seen through the first half of the year. This weighed heavily on refinery runs, which finished Q3 down nearly 1 Mbd y/y.
• The lack of ability on the part of Chinese refiners to export excess clean product volumes abroad due to sluggish international demand, has also weighed on runs. In October, just 55% of total clean product export quotas had been utilized and in Q3, seaborne light end and middle distillate departures finished at just 670 kbd, down 300 kbd against the same period a year earlier.
• Slowing clean product demand growth and an outright decline in product exports through Q3 weighed on crude imports. Seaborne oil arrivals in Q3 finished at just 10.1 Mbd, lower 870 kbd y/y. Nonetheless, the situation has shown some signs of improvement into October, with offtakes through the first ten days of October managing 11.1 Mbd. A portion of this increase is likely accounting for the seasonal uptick in runs, albeit some oil inventory restocking is also taking place.
• The forward outlook for Chinese oil demand growth looks likely to slow dramatically relative to the norms seen in the years pre-Covid. Q3 was a wakeup call to the market that China faces new economic challenges that will be hard to fix. While stimulus measures could provide some reprieve, rapid oil demand growth will have to come from somewhere besides China over the next decade.

Oil prices are currently being driven by four critical factors, US economic data (which influences Fed policy), Chinese economic data, OPEC+ production decisions, and the threat of a broadening of conflict within the Middle East. Of these four factors, China is the most important demand side influence on oil prices. In the decade before the pandemic, China was regularly the global demand growth leader. In the eight-year period through 2019, China averaged a yearly increase in clean product demand of just under 340 kbd per year, with these growth figures showing particular strength in 2015 (+477 kbd), 2016 (+610 kbd), and 2019 (+500 kbd).

Nonetheless, as the Chinese economy faces up to serious structural issues, namely over-investment and a need to shift towards a household consumption-led model of growth, the prospect of slowing oil demand has become a center stage issue for the broader market. While our expectation for 2024 Chinese clean product demand growth is set for a respectable 485 kbd y/y increase, much of this strength came through H1 (+660 kbd y/y), before fading considerably into Q3 (+210 kbd y/y). By next year, we anticipate Chinese clean product consumption finishing up just 165 kbd y/y, the slowest pace of growth since 2017, excluding the Covid lockdown years of 2020 and 2022.

Quarterly Chinese Refinery Runs (kbd, top) and Y/Y Delta (kbd, bottom)

Source: Kpler

The slowdown in Chinese domestic clean product consumption puts Chinese refiners in a difficult position. At present, we expect Chinese refinery runs to average 15.36 Mbd this year, a 200 kbd decline against year earlier levels. Much of this throughput weakness began to show itself in Q2, as Chinese debt accumulation into the investment side of the economy slowed relative to the start of the year. By Q3, runs were down by nearly 1 Mbd. While things should improve into Q4 a bit, we still expect utilization to finish lower by nearly 250 kbd against year earlier levels, bringing the outright volume of throughput to just under 15.4 Mbd for the quarter.

The offset to weak domestic demand is higher exports. Unfortunately, a relatively weak international market for gasoline and distillates has limited the optionality for Chinese refiners. This is not only a problem for China’s oil complex. Broad-based tariff implementation across a number of goods, including EVs, crude steel, and copper products, is making life difficult for a number of Chinese producers. According to our calculations, Chinese clean product export quota utilization as of October was holding at just 55%. In September, seaborne light end and middle distillate exports managed just 670 kbd, marking a decline of just over 300 kbd against year earlier levels. Simply put, Chinese refiners have been unable to export their way out of a weak domestic demand situation.

Monthly Chinese Seaborne Light End and Middle Distillate Exports (kbd, top) and Y/Y Delta (kbd, bottom)

Source: Kpler

Unsurprisingly, the lack of domestic clean product demand and exports has weighed on crude imports. Seaborne arrivals in Q3 finished at just 10.1 Mbd, lower 870 kbd y/y to finish at the weakest level since Q3 2022, when Covid lockdowns remained in effect throughout China. The situation has shown some signs of improvement into October, with offtakes through the first ten days of the month managing 11.1 Mbd. A portion of this increase is likely accounting for the seasonal uptick in runs, albeit some oil inventory restocking is also taking place. At present, Chinese onshore oil inventories are holding at roughly 946 Mb, up from 936 Mb at the end of September.

The forward outlook for Chinese oil demand growth looks likely to slow dramatically relative to the norms seen in the years pre-Covid. Q3 was a wakeup call to the market that China faces new economic challenges that will be hard to fix. This Saturday (Nov 12) will be critical. The Chinese government is expected to announce a sizeable fiscal stimulus package that could help to begin the process of economic rebalancing (away from investment towards consumption). However, it is important to keep in mind that stimulus is unlikely to usher in another decade like the 2010s. Rapid oil demand growth will have to come from somewhere else over the next decade.

Daily Chinese Onshore Oil Inventories (Mb)

Source: Kpler

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