CHINA: BIG OIL BUYING
The rise in China's imports of crude oil above 7 million barrels per day (bpd) for the first time looks impressive.
Customs data showed crude imports jumped 13.4 percent in December from a year before, reaching a record 7.15 million bpd.
The big jump wasn't really much of a surprise, given the massive purchases of oil by Chinese traders recently, with Chinaoil, the trading arm of state-controlled major PetroChina, buying a record 47 cargoes, or 24 million barrels, in the Platts trading window in October.
The market consensus is that the Chinese are buying more oil than they need in order to fill strategic reserves, taking advantage of a collapse in prices in the past seven months, with Brent crude dropping from around $115 a barrel in June 2014 to about $46.50 on Tuesday, the lowest in almost six years.
This is almost certainly the case, as the Chinese have in the past ramped up purchases when they consider prices to be relatively cheap.
The questions that remain are how much more can the Chinese buy before their storagetanks are at capacity, and assuming this is still a large number, will it be enough to cause oil prices to rise?
In a rare announcement, China said on Nov. 20 it had filled the first phase of its strategic petroleum reserve (SPR), which holds about 91 million barrels, enough for about 9 days' consumption.
It also said it planned to complete the second phase by 2020, which would hold an additional 170 million barrels.
Consultants Energy Aspects estimated that this second phase of the SPR already held about 80 million barrels, meaning about 90 million more will be needed to fill it completely.
This implies that China will have plenty of scope to keep buying oil for stockpiling, assuming the tanks have finished being built and are ready to be filled.
If it can be assumed that the Chinese will keep filling the SPR in 2015, will this generate enough demand to influence prices?
ONE MILLION BPD GOING TO STORAGE
China's implied oil demand, which is derived from adding net imports of refined products to refinery runs, held above 10 million bpd from September to November and is likely to have done so again in December.
While this speaks of solid demand for fuel in China, it doesn't show convincing evidence of strong growth, which tallies with softness in economic indicators such as the Purchasing Managers' Index.
Should December's implied oil demand come in around the 10.3 million bpd in November, this implies that about 1 million bpd went into storage in December.
This is calculated by adding imports of 7.15 million bpd to domestic output of around 4.2 million bpd, giving a total of just over 11.3 million bpd of available crude, and then subtracting the implied demand of 10.3 million bpd.
If a rate of 1 million bpd of storage is maintained, it seems likely the SPR will be rapidly filled, which may just be the intention of the Chinese, given market expectations that oil prices will stabilise and then rise somewhat by the middle of this year.
In the current market, it also seems likely that even an extra 1 million bpd of Chinese demand won't be enough, by itself, to spark a price rally.
Thomson Reuters Oil Research and Forecasts expects Chinese imports to hold around 30-32 million tonnes in January, or about the same as December's level.
This is oil that has already been purchased, meaning that even though the Chinese were buying record amounts of crude in recent months, the price was still plummeting.
However, the forward curve for Oman futures, a price benchmark for Asia, has been steepening recently, with the six-month contract currently commanding an 11 percent premium over the second month, up from 4.3 percent a month ago.
The increasing contango is a sign that the market doesn't expect the current low price to be sustainable, but a strong recovery is not expected, either.
For the moment, market sentiment is such that it's almost as if the Chinese could buy as much oil as they wanted, without boosting prices.
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