LAUNCESTON, Australia (Reuters) - The current state of China’s demand for crude oil was neatly illustrated by two data points: the first showed imports stayed at elevated levels in August, the second explained why this situation will likely change from October onwards.
China imported 47.48 million tonnes of crude in August, equivalent to 11.18 million barrels per day (bpd), according to customs data released on Monday.
While this was down from 12.08 million bpd and the record high of 12.94 million bpd in June, it was still 12.6% higher than August last year, and the January-August period has seen a gain of 12.1%.
The surge in China’s crude imports has been concentrated in the last four months, from May to August - also the strongest four months on record.
It’s no secret the strong imports are the result of a buying spree by Chinese refiners during the brief price war between top exporters Saudi Arabia and Russia in late March and early April.
So much crude was bought that it led to a queue of tankers lined up outside China’s ports, some waiting for more than a month to discharge cargoes.
This process is ending, but imports will likely remain strong in September as the last of the flood of crude is finally offloaded.
What happens then in the world’s biggest crude importer is far more interesting for the oil market - and the signs are far from bullish.
The expectation is that China will pull back from buying crude, with imports dropping to what would be considered more normal levels, bringing a risk they might even fall below the volume of the same months in 2019 as refiners work through their earlier excess imports.
Evidence of a pullback in China’s demand for crude is that barrels loaded in August and destined for Chinese ports dropped to 7.93 million bpd, down from 8.2 million bpd in July and well down from the second quarter average of 11.87 million bpd, according to data from Refinitiv Oil Research.
In a nutshell, there is considerably less crude currently in tankers heading to China than there was in the May to August period.
SAUDI PRICE CUT
The second piece of information was Saudi Aramco’s decision to cut its official selling prices (OSPs) for October-loading cargoes for its Asian customers.
The Saudi state oil producer said on Sept. 5 that the OSP for its flagship Arab Light crude for Asia would be reduced by $1.40 a barrel to a discount of 50 cents a barrel to the average Oman/Dubai price.
While the cut was in the range predicted by refiners in a Reuters survey, there may be some questions as to whether it was big enough to restore battered margins for many Asian refiners.
The Saudi OSPs have swung wildly this year, with steep discounts at the time of the price war switching to large premiums as Aramco and other exporters in the group known as OPEC+ attempted to drive up prices by restricting output.
For example, the OSP for Arab Light for July-loading cargoes jumped a massive $6.10 a barrel, but for May cargoes it was cut by $4.20 a barrel.
This is a reflection of the impact of the hit to demand from the novel coronavirus pandemic, as well as the brief price war.
The question now is whether Aramco’s discount is enough to tempt Asian refiners to purchase more crude from the kingdom, and other Middle Eastern producers such as Kuwait, whose prices tend to follow the Saudi lead.
They will be up against Russian exporters, as well as those in Africa and the Americas, who tend to price crude against Brent or West Texas Intermediate (WTI).
While Brent and WTI are light crudes, and Arab Light is actually a medium crude, the point is that both Brent and WTI are trading close to parity to Oman futures, where they normally command a premium.
This means that crudes priced against Brent and WTI may enjoy a competitive advantage against those priced against Oman futures and Dubai assessments.
Editing by Kenneth Maxwell
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