9/21/2017 Traders nervously eye China’s strategic oil imports

Commodities
Traders nervously eye China’s strategic oil imports
Industry fears market will become vulnerable once Beijing curtails its stockbuilding

Chinese oil imports have been propping up global crude prices © FT montage; Reuters

AUGUST 18, 2017 by David Sheppard and Anjli Raval in London, Xinning Liu in Beijing

Ten days ago the world’s largest active oil tanker, the TI Europe, pulled into the Chinese port of
Ningbo to deliver its cargo of more than 3m barrels of Middle Eastern crude.

The vessel, which is as long as the Empire State building is tall, is a bona fide megatanker
capable of delivering more oil in a single shipment than any other vessel on earth, and had been
called into service to help meet China’s seemingly insatiable demand for oil imports in 2017.

The TI Europe voyage, one of only a handful of deliveries it has made in the past three years,
highlights how a surge in crude oil imports into China this year has helped prop up an oil market
that has been weighed down by a glut since early 2014.

Prices at about $50 a barrel are less than half their

average between 2010 and 2014, but strong Chinese
At a minimum this market
buying has helped them recover from below $30
needs China to keep buying
early last year.
to stop the wheels from
falling off The oil industry, however, is worried that one of the
MICHAEL TRAN, RBC CAPITAL MARKETS few bright spots in the global crude market may not
last, as China’s oil imports do more than feed its
fast-growing network of refineries.

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9/21/2017 Traders nervously eye China’s strategic oil imports

Much of the oil has, it believes, been earmarked for storage tanks and the country’s Strategic
Petroleum Reserve (SPR), which Beijing has been growing to cushion the world’s second-biggest
economy from future energy shocks.

That stockbuilding, analysts and traders warn, may soon slow or even come to an end, which
could free up hundreds of thousands of barrels of crude into a market ill-prepared to absorb it.

“At a minimum this market needs China to keep buying to stop the wheels from falling off,” said
Michael Tran, director of global energy strategy at RBC Capital Markets, who estimates Chinese
imports have grown at almost double their normal annual rate this year, rising by 1m barrels a
day on 2016.

“If they go back to half that amount of growth this market would be in a very different place.”

It is a concern that illustrates just how important China’s clout has become to the global oil
market. Its consumption has surged fourfold to 12.4m b/d since 1990 and it now imports about
8m barrels a day, or at least as much crude as the US, the only country to still consume more oil
than China.

To ensure China can meet its rising thirst for crude, which is vital to keep its economy growing,
Beijing embarked on an ambitious plan to build a SPR a decade ago. The move mirrors the US,
which has maintained the world’s largest SPR since the Arab oil embargoes of the 1970s, packing
680m barrels of crude into giant salt caverns on the Gulf Coast.

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9/21/2017 Traders nervously eye China’s strategic oil imports

China’s SPR has always been shrouded in relative secrecy, however, making it a wild card for oil
traders struggling to measure supply versus demand.

Sengyick Tee, senior director of SIA Energy Oil Research and Consulting in Beijing, said the
state-run nature of China’s largest oil companies blurred the lines. As well as official tank farms
dedicated to the SPR project, Beijing had also been experimenting with using third-party storage
facilities that would normally hold commercial oil inventories — dubbed the Commercial
Petroleum Reserve — while looking to construct more government-owned storage.

“With national tank farms already mostly filled up, we only have the third-party run storage
left,” Mr Tee said, adding that part of the import surge in 2017 was down to falling domestic
production due to lower prices. “As local production cuts stabilise and given the shortage of
storage room for strategic reserves, there won’t be strong import demand going forward.”

FGE Energy forecasts that in the second half of this year, the increase in imports will slow to
about 700,000 b/d year-on-year from 1m b/d in the first half. Next year, while rising demand in
the country will absorb more barrels, they see imports only increasing by 100,000 b/d — a level
they believe may still be enough to effectively top out storage capacity.

Cuneyt Kazokoglu at FGE said that at this slower pace China’s storage capacity could be filled by
the end of next year. If it keeps growing imports at the same pace as 2017 then “spare storage
capacity will be exhausted by July of 2018,” he said.

All acknowledge that assessing China’s future imports with certainty is an almost impossible
task.
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9/21/2017 Traders nervously eye China’s strategic oil imports

With oil prices still relatively low, many expect China will find ways to keep buying up barrels,
fearing crude could return to higher levels in the future. So-called “teapot” refineries,
independent plants that were only granted import licences in the past two years, are also keen to
keep buying as the amount they bring in one quarter influences how large a quota Beijing will
award next time.

The country’s day-to-day demand will also keep rising over time.

Opec, the oil cartel that has been cutting output to try prop up prices, will be nervously watching
tankers sailing to China, hoping the volume remains high.

“The market needs this to keep going to keep the market rebalancing on track,” Mr Tran at RBC
said.

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