February 4, 2020 / 2:15 AM / 20 days ago

COLUMN-China crude oil imports may not suffer as much as consumption: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

* GRAPHIC: China's total available crude vs refinery runs: tmsnrt.rs/2SgwG9K

By Clyde Russell

LAUNCESTON, Australia, Feb 4 (Reuters) - The crude oil market is increasingly pricing for a major hit to demand from the coronavirus epidemic in China, but there are still factors suggesting the worst case scenario may be avoided.

To see that, it is important to distinguish between China’s crude oil consumption and its level of imports.

It’s entirely possible China’s crude oil and refined product consumption will be hit hard by the economic slowdown likely to result from the spread of the Wuhan coronavirus.

Most market analysts expect a drop in consumption of anywhere between 250,000 barrels per day (bpd) and 500,000 bpd, with jet kerosene likely to be the fuel product most affected as airlines cut back on schedules to and from China.

A scarier figure of 3 million bpd of lost demand was cited on Monday by Bloomberg News, which said the coronavirus that has now killed more than 400 people, has squeezed China’s economy to the point that 20% of daily crude oil demand has evaporated.

But even if Chinese fuel consumption does fall sharply, it doesn’t necessarily translate into an equal decline in the level of crude oil imports.

China is still building commercial and strategic stockpiles and it may choose to add to these storages at a faster pace, rather than cut back substantially on imports.

A better way to look to look at China’s crude oil demand is to add together domestic consumption, inventory flows and the export of refined products.

There is a fair degree of certainty that domestic consumption will be lower, but still considerable uncertainty as to how much the decline will be.

There are reports of Chinese crude traders seeking to defer March-loading cargoes, and major refiner Sinopec as well as smaller processors, are planning to cut throughout. Reuters reported on Monday that Sinopec will trim 600,000 bpd of its processing, about 12% of its capacity, this month.

Exports of refined products may offer Chinese refiners a way of getting rid of excess production, but it should be kept in mind they can only ship out what their quotas will allow.

What this means is there is a cap on exports of refined products, unless the authorities decide to issue more quotas.

STORAGE FLOWS

Another uncertainty is whether China will take the opportunity of weaker domestic consumption to build its strategic petroleum reserve (SPR) faster and at a lower price.

China doesn’t disclose the volumes going into the SPR or commercial inventories, but an estimate can be made by subtracting the amount of crude processed from the combined figure for crude imports and domestic production.

On this basis China directed about 880,000 bpd into inventories in 2019, and it’s not inconceivable it may decide to increase this in light of the virus.

As a contrarian trade it makes financial sense, as the price of crude has fallen, meaning China can buy cargoes for delivery in coming months at a substantially lower price than it could a month ago.

Since the new coronavirus started to make headlines, Brent crude futures have surrendered 17% from the close on Jan. 20 to Monday’s finish of $54.45 a barrel, while Oman futures have given up a similar 16.4%.

It’s worth noting that the losses for crude have been concentrated at the front of the curve, leading to some flattening for contracts for later-delivery months.

At the close on Monday, the front-month Oman future was at a premium of just 2.5% to the six-month contract.

A month ago on Jan. 3, the premium of the front-month over the six-month was 6.8%.

It may be that some traders see an opportunity to lock in cheaper crude for delivery around mid-year, betting that by then the virus will have been contained and Beijing will be implementing fresh stimulus measures to boost the economy. (Editing by Tom Hogue)

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