Column: China Cuts Crude Inventories, Ends Oil Demand Growth Engine: Russell

Oil and gas tanks are seen at an oil warehouse at a port in Zhuhai, China October 22, 2018. REUTERS/Aly Song

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LAUNCESTON, Australia, Jan 25 (Reuters) – China’s stockpiling of crude oil nearly came to a standstill in 2021, reversing years of steep increases as the world’s biggest fuel importer built up strategic reserves.

China likely added about 170,000 barrels per day (bpd) to its strategic and commercial stocks last year, down sharply from 1.26 million bpd in 2020.

The reduction in crude inventories means that China’s role as a major driver of crude oil demand growth could fade and imports should come more into line with its refinery throughput rates.

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China does not disclose crude volumes entering or leaving strategic and commercial stockpiles. But an estimate can be made by deducting the total amount of crude available from imports and domestic production from the amount of crude processed.

Crude imports were 10.26 million bpd in 2021, while domestic production was 3.98 million bpd, for a combined total of 14.24 million bpd available to refiners.

Refinery throughput was 14.07 million bpd, meaning refiners processed about 170,000 bpd less than crude available from imports and domestic production.

This relatively small amount flowing to storage reservoirs has broader implications for the overall crude market.

If China continues to reduce its oil purchases for its reserves, it is likely that its overall crude import growth will be modest.

Imports actually fell in 2021 for the first time in 20 years, falling 5.4% from 10.85 million bpd in 2020 to 10.26 million bpd.

China has accounted for 44% of global oil demand growth since 2015.

Another factor to consider is that China still added reserves in 2021, rather than tapping into some of the massive stockpiling it undertook in 2020, when it scooped up huge volumes of cheap oil. during a brief price war between major exporters Saudi Arabia and Russia. and as prices fell amid the initial outbreak of the coronavirus pandemic.

That means China still has all the extra oil it bought in 2020 to hand over to its refiners if it chooses to try to drive prices down by selling from reserves.

Beijing sold tracts of crude from reserves last year as crude prices surged above $80 a barrel in October, and with benchmark Brent futures nearing $90, it is likely that official authorities are once again concerned about high oil prices.

Brent finished at $86.27 a barrel on Monday and is about 25% above the recent closing low of $68.87 on Dec. 1.

Crude Oil Available in China Compared to Refining Cycles


It appears that lower oil prices in November and early December boosted China’s crude oil imports in December.

Customs data for December showed imports of 10.86 million bpd, up 10.4% from November, as arrivals by sea from neighboring Russia rose to the maximum since June 2020, according to data compiled by Refinitiv Oil Research.

Increased imports in December led to crude being added to inventories during the month, with the total amount of oil available from imports and domestic production exceeding refinery throughput by 920,000 bpd.

That process could reverse in January, with Refinitiv expecting imports to fall to 9.57 million bpd as refiners limit processing due to pollution concerns ahead of the Beijing Winter Olympics.

Imports from China are normally robust in the first quarter of the year, as independent refiners have new import quotas and generally seek to build up commercial stocks ahead of the peak in summer demand.

The Olympics could slightly delay this process, but the biggest risk for Chinese imports in the coming months is that a combination of high prices and still high inventory levels could cause refiners to limit their oil purchases.

GRAPH-China total crude available vs refining runs:

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Editing by Richard Pullin

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Steve R. Hansen