Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on July 16, 2018
Chinese Oil Demand Growth Could Slow Down Soon
Oil demand growth in the world’s biggest oil importer—China—is at risk of slowing down, at least in the coming months.
Higher oil prices play a role in this, but the main culprit is a new tighter tax regime on independent Chinese refiners, which is already choking the refining margins and profits of the so-called ‘teapots’ who have grown over the past three years to account for around a fifth of China’s total crude imports.
The teapots have become instrumental in China’s growing thirst for crude oil after the government started allocating import quotas to the independent refiners in 2015.
Under the stricter tax regulations and reporting mechanisms effective March 1, however, the teapots now can’t avoid paying consumption tax on refined oil product sales—as they did in the past three years—and their profit bonanza is coming to an end.
Despite ample government-approved crude import quotas, independent refiners are now losing money on refining, cutting utilizations rates, and closing for maintenance to cut exposure to the unfavorable market conditions. With higher oil prices this year and the hefty taxes they now can’t avoid paying, the teapots are expected to reduce their imports, threatening China’s oil demand growth and ultimately, global oil demand growth.
Last year alone, the independents accounted for 85 percent of China’s crude oil import growth, according to data by S&P Global Platts.
Although China issued last week its second batch of crude oil import quotas to independent refiners for 2018, the teapots are unlikely to use up all their quotas this year, because it wouldn’t make business sense to refine crude at a loss just to have quotas fully utilized to make sure that they would qualify for quotas next year.
“Refining is a business. If processing crude results in losses now, it is unwise to take more crude just for securing quotas for the coming year,” a Guangzhou-based trader told S&P Global Platts.
Refining is indeed a business, and it’s a losing one for the independent refiners now.
According to data by Zibo Longzong Information Group, as carried by Reuters, independent refiners were losing US$45 (300 yuan) per ton of crude oil processed in May, compared to a profit of US$135 (900 yuan) per ton at the beginning of 2016.
The higher sales revenue from higher retail prices have been wiped out by the higher crude oil prices and the taxes.
“We expect much weaker margins in June and July as more orders booked at peak crude prices arrive,” Gao Jian, crude oil analyst with China Sublime Information Group, told Reuters.
In response to the losses, a few teapots shut for maintenance in May and June to avoid exposure to the unfavorable market conditions, and some of them may not reopen at all if those conditions persist, according to Reuters.
Platts data shows that crude oil imports by the independent refiners hit a 20-month low last month, as a record-high inventory had piled up at major ports in the Shandong province, home of most of the teapots.
China’s overall crude oil imports in June dropped for a second consecutive month and hit their lowest level since December 2017, on the back of trimmed purchases by the teapots. Chinese imports stood at 8.36 million bpd last month, down by 9 percent from May’s imports of 9.2 million bpd, and down compared to the 8.8 million bpd imports in June 2017, data from the General Administration of Customs compiled by Reuters shows.
China’s imports for the first half of 2018 were still up compared to last year, by 5.8 percent to around 9.07 million bpd.
Yet, independent Chinese refiners could further trim imports in the coming months as their refining business is now at a loss, due to the hefty taxes and the higher and volatile crude oil prices.
“The oil price volatility is certainly not helping as not many independent plants are doing sophisticated hedging,” Seng Yick Tee with consultancy SIA Energy tells Reuters.
The higher import and tax expenses are now leading to the teapots cutting purchases in order to keep afloat in their once-lucrative refining business. Lower purchases from the chunk of the Chinese market accounting for one-fifth of the country’s oil imports could spell trouble for Chinese—and global—oil demand growth.
By Tsvetana Paraskova for Oilprice.com
6 Comments on "Chinese Oil Demand Growth Could Slow Down Soon"
twocats on Mon, 16th Jul 2018 8:33 am
wwwhhhhaaat?!!? it’s almost like each link in the energy chain needs to make a profit (energy/value extracted) in order to produce energy. It’s almost like you need some net positive result on the energy you are expending in the first place. weird.
JuanP on Mon, 16th Jul 2018 9:43 am
“China’s economy expands steadily despite trade frictions”
http://www.xinhuanet.com/english/2018-07/16/c_137328649.htm
Outcast_Searcher on Mon, 16th Jul 2018 2:34 pm
OK, so let’s pretend GDP growth doesn’t produce more oil demand, year after year after year. Let’s pretend China won’t continue to grow GDP at a much faster rate than places like the US and Western Europe over time.
Let’s pretend that China’s car market isn’t the largest in the world, with 2017 passenger vehicles near 25 million, up from only 15.5 million just 5 years prior to that.
If refining margins in China are too narrow, maybe they’ll import more gasoline and diesel. But let’s not pretend that demand growth will magically “slow down soon”.
Davy on Mon, 16th Jul 2018 3:39 pm
Let’s not pretend it can’t slow down and quick. Works both ways
Antius on Mon, 16th Jul 2018 3:55 pm
China cannot slow down without collapsing. It’s debt levels are so high and growing so fast, that it can only survive by continuing to expand, such that new earnings pay the interest on old debts. Trouble is, debt to gdp ratio keeps expanding! Much like the UK, if they try to raise interest rates, debt becomes unservicable. Yet their currency is taking a beating, just as oil prices in dollars are rising again. What to do? Sit back, be patient, and hope Trump doesn’t win a second term.
Davy on Thu, 19th Jul 2018 6:25 am
“Global Stocks, Futures Slide As Yuan Crashes”
https://tinyurl.com/ycz9b4bz
“Having ignored the creeping devaluation in the Yuan in recent days, today global equity markets had no choice but to notice that the plunge in the offshore Yuan is accelerating, and with no intervention by the PBOC, the Chinese currency tumbled to the lowest level in a year, which in turn has pressured Asian and European stocks, and US equity futures as traders start to worry that China is responding to trade war with currency war.”
“However the big catalyst, as we reported last night, is that Beijing has launched a quasi-QE, in which the central bank announced it would use monetary policy instruments such as its medium term loan facility (MLF) to support the local bond market and banks, especially those that have invested in bonds rated AA+ and below. Effectively, the PBOC will provide banks with liquidity, which they will then either lend out or use to buy stressed bonds, resulting in a hybrid QE outcome. As a result, The yuan has fallen more than 4% in the past month, the worst performance among 31 major currencies, as China’s economy decelerates and the trade spat with the U.S. escalates. According to Pimco, China will tolerate higher volatility in the yuan and a moderate weakening of the currency as long as there’s no major threat to financial stability.”
“Of course, the question then becomes how will Trump respond when he learns that instead of responding tit-for-tat to his trade tariffs, Beijing is engaging in not so stealthy devaluation: and it is concerns about Trump’s unpredictability, together with worries about rising Yuan volatility and growing capital outflows, that are pressuring global markets. “If the difference between the two markets becomes too big, that could mean the PBOC is intervening in the market.” As a result of the ongoing yuan devaluation, a downbeat mood gripped equities, as European and Asian stocks dropped and even as corporate earnings continued to come in strong, S&P futures slipped.”