Thread by @Big_Orrin

1 A short Thread on why we need to be careful about demand from China.

Pre COVID in China

Crude oil imports
+ Product imports
=
Internal Chinese Consumption (via refineries)
+ Build in Crude oil SPR/commercial inventories
+ Build in product SPR/Commercial inventories

2.

What will happen going forward

Crude Oil Imports
=
Internal Chinese Consumption (via refineries)
+Product Exports

The question will be if Chinese consumption has grown more than the reduction in the building of inventories?

3. Yes Chinese refinery capacity has increased but seeing China move from a net-importer to a net-exporter of product means that the more efficient Chinese refineries takes crude demand from non-chinese refineries. China refinery demand growth will mean lower demand elsewhere

4. China has grown its SPR/Commercial inventories of both crude and products to a much higher level than they were prior to the pandemic. Products have basically reached tank tops. Pre-COVID China was trying to build its SPR. Now it has a significant SPR

5. Geopolitically, things have changed for China in the world of oil as well. Since the Pandemic, China has significantly strengthened its relationships with most Oil producers while the US's strength of relationship has weakened.

6. It means that it will be difficult for China to be sanctioned out of the oil market. Would Saudi Arabia now refuse to sell to China its biggest buyer?

Means that China may not need to build such a big SPR and it also means they can use the current SPR to try and control price

7. How will China control price. 3 ways

1. More control over Import crude quotas. Means teapots cant go crazy forcing up prices
2. Product export quotas. Control internal Chinese refinery demand for crude oil.
3. Release from SPR as prices go up and buy when prices are low

8. The baseline demand from China has changed from pre-COVID levels. So to make comparisons with it and have expectations it will return in the same way is likely incorrect especially as the Chinese economy is not at the same growth levels.

9. Chinese demand will return but as said before is the increase in consumption greater than the reduction in the builds in inventories?

In the physical market we already have good forward looking information

10. October-December loading cargoes saw good buying from China. However those cargoes were bought between August and November. Since then Physical differentials collapsed for January and particularly February loading cargoes.

11. Feb loading programs been selling for weeks and Chinese demand has not exploded. These cargoes will arrive March-May. They will likely be run through refineries in May-July. So physical market already seeing Chinese demand 6 months ahead and has not incresed significantly

12. As I said before we need to look at China with different eyes than the past on oil demand