Assessing Chinese refinery runs - update on methodological changes
The Chinese reopening has certainly injected a fresh set of uncertainties into a market already overrun with unknowns. In the weeks since China has undone much of the zero-Covid policies in place for more than two years, mobility has shown clear signs of picking up and yet, refinery runs surged to new highs months earlier.
The reason for this difference in timing has to do with the surprise issuance of additional clean product export quotas in September of last year. The move effectively gave Chinese state-run refiners the green light to export plenty of clean products into the international market, reversing a policy of strict export limits that had been in place for the better part of a year as Chinese lawmakers looked to emphasize domestic supply availablity above all else. Nonetheless, after months of lockdown, the Chinese government changed its strategy, throwing a lifeline to ailing refiners.
Monthly Chinese Seaborne Oil Imports (kbd, left) and Onshore Inventories (mb, right)
Beginning in October, Chinese oil imports began to surge, pushing to 9.94 Mbd, before increasing even further in November (10.7 Mbd) and December (11.3 Mbd). Arrivals through the final month of the year not only managed a gain of 1.33 Mbd against year earlier levels, but finished at the third highest level on record, only falling behind that of June and July 2020, when Chinese purchasers went on a buying spree amid depressed spot prices. The uptick in arrivals helped to slow the pace of inventory draws that initially dominated. September alone saw stocks decline 27 mb m/m. Concurrent with the rise in oil imports was a surge in seaborne clean product exports. By December, departures had peaked at a whopping 1.8 Mbd as refiners re-exported lots of what was being produced domestically. Of this December total, roughly 630 kbd was confirmed gasoil/diesel with an additional 733 kbd tagged as gasoline.
Monthly Chinese Seaborne Clean Product Exports (kbd)
The situation has shifted into January, albeit changes could be temporary. Clean product exports have weakened considerably, holding just under the 1 Mbd level. While this is certainly a decline off elevated levels seen in December, it is important to point out that removing Q4 from the picture, January loading totals would have held towards the upper end of the historical export range. The reasoning for decline in departures could be a result of three separate reasons. First, it is likely that domestic demand has risen off the lows from late-2022, albeit the extent of this recovery appears limited. On January 20th, before the effects of the Lunar New Year began to set in, flight volumes were some 37% above 2022 levels, albeit remained some 17% under pre-pandemic levels. Metro passenger volumes across 13 major Chinese cities peaked on January 15th at 29.6 million passengers, up from lows near 13.9 million on December 23rd, but down from 36.8 million in the same period a year earlier.
Second, we estimate that Chinese refinery runs have declined into January. While official government data is lagged, we have implemented an implied Chinese refinery runs total that reflects real time and historical Kpler data. This involves taking Kpler flows (net seaborne imports) and inventory data and combining with estimated pipeline flows (from Russia and Kazakhstan) and domestic production, which has long held to a tight bounded range. The reasoning for implementing such a system is an attempt to provide a transparent accounting of Chinese refinery demand. We suspect that NBS (National Bureau of Statistics) data has consistently under reported real throughput for many years given issues with consistent data collection, especially for teapot refiners who would prefer to go unnoticed by Chinese policymakers. These methodological changes have already been implemented into the S&D platform within the Kpler front end terminal, marking a change from our original methodology, which relied on NBS data as a source for utilization. This change considerably increases our forecast for demand given large upward revisions across a number of months in the past and present following our updated methodology. Effects on our oil balance are permanently set at a new normal.
Monthly Chinese Implied Refinery Runs with Forecast (kbd, top) and Y/Y Delta (kbd, bottom)
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