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China’s refining recovery looks set to stall

Crude oil throughput at refineries broke records in October, but the market will not fully get back on track until next year

China’s refineries were busy in October as they processed record volumes of crude oil to keep up with strong holiday-driven demand. But the near-term outlook appears challenging as domestic overcapacity will continue to grow while overseas demand will remain weak.

Crude oil throughput at Chinese refineries last month reached a highest-ever level of 59.82mn t, up 2.6pc from a year ago and equivalent to 14.15mn bl/d, according to figures from China’s statistics bureau released on Monday. That compares with 14.01mn bl/d in September and topped the previous record of 14.14mn bl/d set in June.

Petrol and diesel demand picked up last month as more motorists hit the road for long-distance driving during a week-long public holiday at the start of October. Jet fuel consumption has also rebounded thanks to a fast recovery in domestic flying and cargo freight.

“We project China to have over 100mn t of oil product surplus in 2025” Han, CNPC

The new high for crude runs is the latest sign that China’s fuel market is continuing to shake off its Covid-19 slump from earlier this year, and follows upbeat third-quarter earnings last month from state-run refiners Sinopec and PetroChina that were driven by stronger refining and chemical demand. The rebound began in March/April, shortly after China contained its worst coronavirus outbreaks and reopened its economy.

While encouraging, the record throughput does not mean China’s demand for refined oil products has fully rebounded nor that the market will claw back all of the ground lost this year. China’s domestic demand will not recover to pre-pandemic levels until next year, while second- and third-wave coronavirus lockdowns across the world will continue to keep overseas demand for Chinese exports below that of 2019, Han Bing, a marketing director at PetroChina’s parent company, China National Petroleum Corp. (CNPC), said at an industry event in Shanghai in November. 

Faltering momentum

The sense from market participants is that the bulk of China’s post-lockdown oil demand recovery has passed, and that the momentum may stall entering the winter. This outlook has been borne out so far by monthly data from China’s transport ministry that indicates the rebound in domestic travel activity is running out of steam.

Passenger traffic on China’s roads in September was down 38pc year-on-year, a marginal improvement from declines of 39pc in August, 42pc in July and 43pc in June, according to calculations by Petroleum Economist using ministry data.

China’s domestic passenger air traffic has done a better job of catching up to last year’s levels, with the year-on-year change narrowing from a 42pc decrease in June to 34pc in July and 26pc in August, but international flights remain in the doldrums.

Han predicts that China’s apparent domestic oil product demand will fall by 4.7pc year-on-year in 2020, to 322mn t, led primarily by a 28.9pc plunge in jet fuel consumption followed by a 2.4pc decrease for petrol and a 1.1pc fall for diesel.

4.7pc – Fall in China’s apparent domestic oil product demand in 2020

The stalling demand recovery comes as China—the second-largest operator of refining capacity after the US—prepares to bring an immense amount of new capacity online over the next five years, even as its fuel demand is expected to peak in the interim.

Han forecasts China will add 135mn t/yr of additional capacity over 2021-25, to reach a total of 1bn t/yr—equal to 51pc of the predicted capacity of Asia Pacific. Approximately half of this boom will come from independent refiners, known as ‘teapots’.

“The additional product supplies would have nowhere to go, [so] refineries have to cut utilisation rates as a result,” says Han. “We project China to have over 100mn t of oil product surplus in 2025, which would only go to international markets as domestic demand growth slows down and will peak soon in around 2025,” Han says, adding China’s total fuel demand is expected to grow by just 20mn t in 2021-25.

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