With OPEC+ outlining its supply roadmap for the next 18 months, market attention now shifts to demand growth trajectories, particularly focusing on China's oil consumption. We anticipate that demand in the world’s largest crude importer will remain robust this summer, supported by seasonal demand, but may struggle to sustain its growth momentum towards the end of 2024.

Brent prices appeared to bottom out at around $80 per barrel after a week of turbulence following OPEC+'s complex supply adjustments in early June. Having overcome the initial shock and panic, the market readjusted its mindset, accepting the gradual increase in production as a given. The key issue now is whether the increase in demand can keep pace with rising production, with China being the most obvious focal point in this equation.

China’s economic growth is becoming increasingly problematic, as Beijing’s manufacturing-centred investment boom and the surge in exports stoked concerns in a number of countries. This dynamic also results in a lesser increase in domestic fuel demand amidst patchy recovery in non-manufacturing sectors and weak consumer confidence. In the first five months, our data indicates that China’s seaborne crude oil arrivals dipped 83 kbd y/y to 10.5 Mbd. Corroborating this year’s lower intake, Chinese customs data showed the country’s total crude imports (including pipeline inflows) were 130 kbd lower than a year ago, despite refinery maintenance this spring being less extensive than in 2023.

Nonetheless, China’s crude imports should find some supports from June through Q3 amidst a revival of refining activity post-maintenance, the depletion of oil inventories, and easing oil prices. Chinese refiners need to replenish stockpiles in preparation for the return of some 360 kbd refining capacity in July and another 420 kbd in August. This is especially crucial as current non-SPR oil storage levels are at their lowest for this time of year in the past four years.

China’s non-SPR crude oil inventories, Mbbls

Source: Kpler

Arrivals of arbitrage barrels from the Atlantic Basin are expected to flare up in June and July as Chinese refiners snapped up a substantial number of cargoes at the end of April and May trading cycles when WAF prices were under pressure due to anaemic European demand. Over 1.2 Mbd of WAF crude is set to reach China in June, highest level since August 2023. With the spread between Brent- and Dubai-pegged oil largely hovering below $1/bbl so far this month due to the ample global supply of light sweet barrels, WAF crude remains attractive to Chinese buyers. US crude exports to China are also expected to rebound in June, which will be reflected in July-August arrival numbers.

However, China’s intake of July-loading Saudi crude, the country’s second largest import source, is likely to fall to its lowest level since March 2020, the peak of the COVID-19 outbreak. According to several market participants, China will lift only some 36 Mbbls of Saudi oil next month, down 3 Mbbls from June and 9 Mbbls less than May, primary due to bearish sentiment on China’s fuel demand. The low nomination is particularly alarming as Saudi Aramco cut its OSPs to Asian customers for the first time since March for July-loading cargoes, which should have stimulated buying interest. One possible reason is that Chinese buyers are adopting a wait-and-see approach, anticipating weaker prices later this year with eight OPEC+ members, including Saudi Arabia, increasing output in Q4. Despite some depletion over the past weeks, current Chinese onshore inventories are equivalent to more than 80 days of its net imports. Furthermore, faltering refining margins and lukewarm refined products consumption in China have prompted some state-owned refiners to consider reducing refining runs this month, despite ongoing maintenance.

China’s refining margins for domestic supply, $/bbl

Source: Kpler

China is scheduled to export 3.56 Mt of transportation fuel in June, bringing the total export quota fulfilment rate to 85%. That said, Beijing will need to issue a fresh batch of export allowances next month to help refiners alleviate product inventory pressure, despite unfavourable export margins and increasing supply from Middle Eastern refineries.

On a brighter side, however, China’s teapot refineries are returning to the crude market for purchase as the rising HSFO cracks make fuel oil originated from Russia and Iran less economical. May-arrival fuel oils already declined by 131 kbd from a 10-month-high level logged in April and June barrels are expected to fall further. The reinstatement of US sanctions on Caracas from June will redirect more heavy sour Venezuelan barrels to China, which has pushed down Merey prices to a discount of around $12.5/bbl against ICE Brent on DES basis from a discount of $8/bbl three months ago. More Russian cargoes are also expected to land in China as India will scale down crude intake during the monsoon season in Q3, a period when some 433 kbd of primary refining capacity will be offline for maintenance.

However, the sustainability of Chinese oil demand growth is questionable given the underlying structural challenges facing the economy. As the pent-up demand from the end of the COVID era fades, the real impact of the damage to China’s economy is just beginning to be felt. We anticipate China’s crude intake to grow by 150 kbd y/y in 2025, a smaller scale compared to an increase of 217 kbd in 2024 and 662 kbd in 2023.

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