China’s oil imports are plunging as Beijing cuts supplies to dirty local oil refineries. Oil shipments to the world’s largest crude importer fell 20% in both June and July, year-on year, mainly because the government is reducing import quotas for independent refineries that fail to meet environmental standards.
Contributing to the decline is the government’s decision to release part of its oil stockpile to hold down oil prices and inflation. Declining imports by the world’s second-largest oil consumer after the U.S. could curb the recent uptrend in oil prices.
China’s crude oil imports for January to July fell 5.6% on the year to 301.83 million tons, according to customs authorities. The decline has accelerated in the past few months. China’s oil imports in June shrank to 40.13 million tons, the lowest level of the year. Imports in July remained low, at 41.24 million tons. The figures for the two months represent year-on-year falls of about 20%.
In 2020, China stepped up crude imports to take advantage of lower prices and enhance its energy security, taking in a record 53.18 million tons in June last year. The government has since scaled back its purchases.
The market has reacted strongly to the latest Chinese oil import data. In Aug. 9 trading in New York, the front-month contract for West Texas Intermediate (WTI) crude oil futures dropped 4.6% to $65.15 per barrel, the lowest reading in about two and a half months.
Beijing is cutting back on oil import quotas for independent refineries, also called teapot refineries, in Shandong and other provinces. In 2015, the government opened its crude oil imports to these small plants, as well as state-run refineries, to foster competition into the oil market. Teapot refineries have driven growth in Chinese oil imports in recent years, accounting for 20% to 30% of total demand. Shandong Province is the nation’s oil hub and home to many of these small independent refineries.
But they largely churn out low-quality oil products using aged, dirty facilities. The government has become more concerned with their product quality and environmental performance, slashing their import quotas in the second half of 2021 by 35% from a year earlier.
“China is cracking down on refineries that fail to meet environmental regulations as environmental awareness grows,” said Mika Takehara of the Japan Oil, Gas and Metals National Corp. (JOGMEC). The country is trying to reduce its carbon footprint, according to Takehara.
Also contributing to the fall in China’s oil imports is the government’s move to release part of its oil stockpile. The government has been supplying oil to the market since July, Bloomberg News has reported. The move is aimed at keeping inflation down by cutting the country’s oil import bill. In a similar move in early July, Beijing released part of its copper and aluminum stockpiles.
China’s economic recovery may also be weakening due to a resurgence in COVID-19 cases, further depressing demand for crude imports. “COVID travel restrictions are dampening the economy and stifling energy demand,” Takehara said.
Coordinated output cuts by major oil-producing nations, combined with economic recovery in many industrial nations, pushed up WTI futures to $75 a barrel in mid-July, a rise of some 60% from the beginning of the year. But the crude price benchmark has since fallen back to around $67.
Complicating the picture is turmoil in Afghanistan, which has muddied the outlook for Middle East oil production. At the same time, there are growing concerns that the economic recovery is peaking out in the U.S., the world’s largest oil consumer.
A continued fall in China’s oil imports could “ease upward pressure on crude prices, which have been stuck in high levels,” said Tatsufumi Ogoshi, a senior economist at Nomura Securities.
Source: Nikkei