Chinese petroleum demand rises despite slowing down in economic data

Although recent economic data show sluggish growth of Chinese economy, petroleum demand in August was unexpectedly steady.

Apparent petroleum demand, or pure domestic demand, in China rose 3.7% on year to 9.74 million barrels per day, according to Platts' estimation. Demand in the first eight months rose 1.2% from a year ago.
Since demand fell 2.1% on year in July, quarterly growth data might be about 1% on year growth.

Platts' data do not include change of petroleum stockpile. Meanwhile, Xinhua News reported that end-August stocks of petroleum products fell 6.2% from a month ago. Especially, gas oil inventories decreased 10.3% from a month earlier.

China's domestic petroleum demand that contains the inventory movements was 10.01 million bpd, up 4.7% on year. However, it is doubtful that the figures really reflect the nation's petroleum demand.
News have reported sluggish gasoil sales in China despite the large decrease of stockpile

Crude oil processing by Chinese refineries in August rose 4.4% from a year ago, according to the National Bureau of Statistics. But refineries might have increased processing because they did not have enough crude oil storage capacity.

Higher crude oil processing produced large number of petroleum products in China. Oil companies seemed to be unwilling to keep high products inventories, since prices were softening.

Domestic official petroleum sales prices have caught up with the movements of international markets more timely after the Chinese government changed the price setting methodology last year.

Firmer petroleum demand in China is very strange. It is inconsistent with decreasing petroleum demand in other Asian countries like India and Japan as well as slump in Chinese economic data.


Fossil fuel costs for nuclear outage in Japan to be offset by decreasing crude oil imports

Japan's crude oil imports fell 19% on year to 2.74 million barrels per day in May, according to customs data. It was first time that the country's crude oil imports slipped below 3 million bpd level since 1969.

Reduction of crude oil distillation capacity and the seasonal maintenance seem to cause the sharp drop of procurement. Crude oil processing in Japan fell 3.7% and 3.3% from a year ago in April and May, then it shrunk by 15% on year during the first three weeks in June. However, there has not been reported a lack of petroleum products in the market.

Japanese oil companies consolidated their refining facilities following the Energy Efficiency Law that was enforced in 2009. They cut about 400,000 bpd of crude oil throughput capacity in 2010, then reduced further 500,000 bpd until the dead line of the consolidation that was set at end of March this year.

In Japan, petroleum demand was predicted to increase to make up for nuclear power supply outage since 2011. But actually total crude oil imports by the nation has not increased despite additional demand from the power sector.

Even demand for thermal power generation has sustained Japan's petroleum demand despite declining fuel consumption in transportation sector that is affected by fuel-efficient vehicles, it could not boost the total crude oil imports.

Meanwhile, growth of electricity demand has been usually negative in Japan after 2011 due to power saving and change of the industrial structure. Although relatively high industrial activities supported power demand in February and March this year prior to the consumption tax hike on 1st April, reaction against that depressed the growth rate to about 2% per annum of decrease in April and May.

If Japanese oil companies reduce their crude oil procurement by 400,000 bpd (about 80% of scrapped capacity since mid-2013), the nation's trade deficit could decrease by 1.6 trillion yen ($15.8 billion) per year.
On the other hand, Japanese power companies have bought additional 17 million tonnes of liquefied natural gas for thermal power generation after 2011. It roughly costs about 1.5 trillion yen ($14.8 billion) annually.

Payments for fossil fuels are considered as one of main reasons of Japan's 11.4 trillion yen ($112.4 billion) of huge trade deficits in 2013. However, additional fuel costs to make up for nuclear power outage is not exceeding 2 trillion yen, and it is likely to be offset by reduction of crude oil imports in the near term.


Mysterious large crude oil imports by China

China has procured large amount of crude oil since late last year. Accumulated supplies exceeding processed crude oil during the past several months seem more than the country's strategic reserve capacity. Even if Chinese statistics data are not credible, many institutes use these figures for calculating their world petroleum demand forecast. The suspicious crude oil procurements by China may lead amendment of future petroleum demand.

Total crude oil supply in China rose 5.3% on year in May to 43.84 million tonnes or 10.36 million barrels per day, while growth of crude oil processing in the same month stayed at 3.5% on year to 40.33 million tonnes or 9.53 bpd, according to the government data.

Crude oil supply in May exceeded processing volume by 3.51 million tonnes. Accumulated oversupply in the first five months in 2014 is nearly 14 million tonnes. The figures include commercial stockpile.
China's commercial crude oil stockpile level as of end-April was estimated about only 1.7 million tonnes higher than that at the end of 2013, according to data issued by Xinhua News. Therefore, crude oil oversupply during Jan-May excluding the growth of commercial stockpile seems still being more than 10 million tonnes, or 73 million barrels.

However, there is a question. Does China have enough storage capacity for the large strategic petroleum reserve? PetroChina estimated that national stockpile capacity as of end 2103 was 140 million barrels, while International Energy Agency saw it could be about 160 million barrels.

First phase of Crude oil strategic storage facilities in China were built by the end 2009. The total 103 million barrels facilities were filled in 2010. Then 169 million barrels of second phase facilities are planned to complete by 2015. The construction has delayed.
Part of the second phase facilities were completed in 2011 and they were filled with nearly 80 million barrels of crude oil in the first half of 2012.

Fresh news on strategic reserve facilities have not been reported after that. But China started to procure large crude oil since late last year. Total oversupply excluding movements of commercial stockpile during November 2013 and May 2014 reached 120 million barrels. Such volume is not able to store even if the second phase of national stockpile facilities are completed.

Where are the massive crude oil stockpiles stored? Is China really importing such large crude oil shown in its Customs data?


China crude oil imports still exceed demand

China's crude oil imports in May rose 8.9% from a year ago to 6.16 million barrels per day, according to the General Administration of Customs. Meanwhile, the number fell 6.5% from the previous month's record imports of 6.81 million bpd.

 Although Chinese crude oil imports are slowing from April, it still remains at relatively high level. If domestic crude oil production in May stayed at same level as Jan-Apr, total crude oil supply in the month would be about 10 million bpd.

Chinese refineries should increase their throughput level by 8% on year in order to process the entire supply. However, it is impossible because accumulated crude oil processing in the first four months in 2014 only increased by 1.8% on year. Moreover, Chinese refineries are typically shut their facilities in May and June for maintenance prior to summer demand season.
Therefore, crude oil imports in May still seems including procurements for strategic reserve.

On the other hand, Chinese trade surplus in May surged to 35.9 billion dollar, the highest monthly surplus since January 2009. Processing trade also recorded two consecutive months growth on year.

These data suggests that energy demand in the country may be underpinned in the near term. But customs data also showed a contrary story that China's petroleum products export exceeded import again following March. It shows that petroleum products are oversupply in China.


OPEC crude oil excesses further due to sluggish imports by US and China

Twelve member nations of the Organization of Petroleum Exporting Countries have maintained their total crude oil production below the target at 30 million barrels per day ahead of its general meeting that is scheduled on 11th June.
Moreover, demand for OPEC crude oil is likely to decrease since imports by two major players - the United States and China may be slowing down in the near term.

Estimated OPEC crude oil production has been below the quota of 30 million bpd since September 2013 except for February.

Global demand for OPEC crude oil is limited due to the increasing supply from non-OPEC producers. Recently, imports by the U.S. is declining sharply and forecasts of Chinese demand is not bright. Petroleum shipments by OPEC members are falling from last year's levels between early April and early June, according to Oil Movements' survey.

In the U.S., regional petroleum demand is slowing down while domestic crude oil production is growing steadily. Moreover, petroleum demand in the country is expected to decrease on year toward the late this year.

The U.S. has been mainly importing OPEC crude oil into the Gulf of Mexico (PADD3) area. However, the region currently does not have enough room to take waterborne crude oil imports since large crude oil flow from inland boosts the stockpile level to the record high.
An additional crude oil pipeline from inland to the gulf area is scheduled to start operation in the near future, so this tendency is likely to be accelerated.

While losing the U.S. market, OPEC anticipated that growing demand from China and other Asian emerging market will offset it. But crude oil processing in India continues to level off after reaching to about 4.5 million bpd in late 2012. Meanwhile, growth of crude oil throughput in China in 2013 remained at 3.3% from a year ago, then slowed to 1.8% growth on year in the first four months period in 2014.

China imported average 6.26 million bpd of crude oil during Jan-Apr, up 11.5% on year, according to the General Administration of Customs. But the high imports caused half million bpd of excess crude oil against processing.

Accumulated excess crude oil during the first four months was more than 10 million tonnes, while commercial crude oil stockpile in China was estimated to gain by about 1.7 million tonnes during the same period. Therefore, 8.3 million tonnes of excess crude oil was likely used to fill up the strategic reserve.

In April, the strategic reserve increased by more than 5 million tonnes, so China's crude oil imports for physical demand in the month were actually fell about 1% on year despite the record high customs data.

It suggests that Chinese crude oil imports will be flat or lower than previous year's level after completing the building of strategic reserve. Thus the country is unable to make up for shrinking demand from the U.S.

On the other hand, some OPEC members like Iraq and Iran are aggressive to increase their crude oil supply. Libya is also expected to resume its supply promptly if current domestic turmoil is solved.

What will other members do? If they maintain the current output levels, total OPEC production will far above the target quota. The excess supplies could depress global petroleum prices as they once were.


Japan's energy demand shows no apparent sign of reaction against tax hike

One and half months have passed after the Japanese government raised consumption tax from 5% to 8%. Many people predicted an aggressive consumption prior to the tax hike and a possibility of reaction after April.

Although Japanese energy demand has been in downward tendency in the past couple of years, both petroleum and electricity demands rose on year in March. Then demand slipped again after April.

However, can we say those were rush demand and reaction against it? Especially, electricity demand significantly fluctuates by weather conditions. I think April data are not enough to be recognized as reaction.

Petroleum demand recorded year-on-year decreases during March and May last year, and is falling further between April and mid-May in this year. Even though, current monthly decreases are still below the average of the past few years.

If we look back on 1997 when the last time Japanese consumption tax rate was increased from 3% to 5%, regional petroleum demand rather increased after the taxation change. Japan's petroleum demand started to decline in late 1997 in step with economic slowdown.

Energy demand in Japan seems not affected directly by the consumption tax increase, once again.


Change of U.S. crude oil stockpile situation

Increase of crude oil stockpile in the United States is depressing prices recently. Market players previously only focused on stockpile in Cushing, but the situation about the U.S. crude oil supplies seem to be changing.

The latest commercial crude oil stockpile in the U.S. nearly reached to 400 million barrels of the highest record, according to the weekly report released by the U.S. Energy Information Administration. The stockpile level is about 80% of current U.S. working crude oil storage capacity. The level was below 70% of the storage capacity in the beginning of this year.

The increase tendency of crude oil stockpile in the U.S. is of course triggered by steady growth of domestic production. Although crude oil throughput in the country has been higher level compared to several years ago, the growth of crude oil production is much faster than that.

Current crude oil supply in the U.S. is concentrated in the Gulf of Mexico area. Total crude oil stockpile as of the end of April in the U.S. rose 1.0% from a year ago. On the other hand, stockpile in the Gulf of Mexico region rose 10.1% on year, while that in the Midwest fell 18.7% from a year earlier.

The contrasting movements were caused by pipeline flows. Previously, crude oil was typically imported into the Gulf of Mexico area then transported to the Midwest through pipelines. But recently, increasing inland outputs are supplied to the gulf region oppositely.

The change of industry and social structure weigh on petroleum demand in the U.S. Fuel conversion to cheaper natural gas also accelerate the tendency.
Meanwhile, U.S. refineries are aggressive to export petroleum products, since their prices are competitive because of cheaper WTI crude oil than global index Brent. Crude oil processing in the Gulf of Mexico area is 10% higher from a year ago. Despite the refinery utilization rate exceeds 90%, larger crude oil supplies are lifting stockpile in the region apparently.

Crude oil imports into the Gulf of Mexico has declined by more than 2 million barrels per day from the levels during 2000s, but it still seems excess.

Current stockpile of crude oil in the gulf area is about 80% of the regional storage capacity. It suggests that the increasing supply through pipelines from the Midwest may cut tanker imports further or encourage the discussion to abolish the export ban for crude oil.

The Obama administration recently postponed decision on the construction of new Keystone XL pipeline that will carry more crude oil from Canada. Many people are discussing environmental issue about the new pipeline, but critical storage problem is also likely to be seen if the new crude oil flow comes into the U.S. without solving export ban.