In this episode of The Crude Report, we look at oil markets through the prism of China, where life seems to generally be back to normal, as even their energy consumption has come roaring back.
Tom Reed, VP at Argus is joined by Li Xiang, Argus' lead crude analyst in Beijing.
Tom: Hello and welcome to The Crude Report, Argus' podcast series on global crude oil markets. My name is Tom Reed, and today we're looking at oil markets through the prism of China. And joining us we have, Li Xiang. Ms. Li is our lead crude analyst in Beijing.
And I think it's really an interesting time to be looking at the Chinese market, in particular because, of course, we're now at a point where there are potentially three very, very promising vaccines which could be on the market by around Christmas and potentially a global inoculation program underway in the first quarter. And China was the first country to emerge from lockdown back in April and is potentially, you know, a very useful leading indicator and a pattern for how oil markets the world over will develop over the next few months.
But I think first, I think it would be very interesting to get a view from you, Xiang, on what's going on in China, what life is like there at the moment, because China's economic recovery has been very impressive since the end of lockdown in Wuhan in April. Has life entirely returned to normal over there now?
Xiang: Yes, life has almost returned to normal over here, and thanks to the good control of the coronavirus by the government. And you see we just come back from the Shanghai conference and it's very safe. Although we all wear masks, but it's very safe. And a lot of people attended the conference and it has succeeded, so apparently our people think is very safe to stay here and they have started to travel again domestically.
Tom: I mean, that is amazing from me sitting in London listening to that. We haven't traveled for months and months. Am I right in thinking that's not because of a vaccination program, but because of the government's track and trace system through apps like WeChat, where the government can see where you are and if you've been to an affected area?
Xiang: Yeah, yeah. We have a trace system that could track where we have been in the past days and if someone is affected by the coronavirus, they will be quarantined, and the rest of the country will carry out smoothly, you know, it's how...
Tom: So this is more track and trace than vaccination. Has the Sinopharm vaccine been offered to many people in China? Have you been offered the Sinopharm vaccine yet?
Xiang: We have been offered, but I haven't seen a lot of people have been vaccinated because I think people show little interest in it or they think, stay here it's very safe, they don't need to be vaccinated. So there isn't a date for a national vaccination.
Tom: Fascinating, I mean, because, of course, in the West, the lockdown and track and trace systems have been possibly less efficient than that in China and so that much more is obviously resting on the success of vaccines. But just to come back to the whole energy aspect of this, of course, since China's economy got back underway in April, May, energy consumption seems to be roaring back. We've seen a real rally on crude in the last few weeks. Backwardation, the premium of prompt to forward crude prices signaling, I guess, tightness in the market, has come back into crude pricing, especially on the Dubai market. But even in the Atlantic Basin, we've seen Brent futures at a premium to Dubai swaps again. How much of this is down to Chinese buying, would you say?
Xiang: It seems evident that China contributed a lot in recent purchases spree that supported differentials on the spot market. So we all know that the oil demand has been significantly affected globally this year by the coronavirus. Well, China can be seen as the only sole country whose apparent oil demand even rose from last year instead of falling as a result of the impact. One of the clearest way of quantifying Chinese demand is through the delivered ex-ship differentials that Argus assesses for the crude traded to China. Because we see now currently the des differentials are at five-month highs right now, and now we see how strong the global demand is. So it's really a good way to reflect the Chinese demand through these differentials.
Tom: And then you're seeing, are you seeing that, is that's translating into demand for any particular grades out of China?
Xiang: Yes, it is. That’s down to the huge amounts of Brazilian Tupi which has a high diesel yields, and also Johan Sverdrup trading to China for delivery in January and February. And we see, like, Johan Sverdrup, there's over a record of 500,000 b/d traded for delivery to China in February. That's even exceeded Norway's planned production in a month.
Tom: And that's presumably, it's a huge drain of North Sea supply. What effect is that having on, I guess, differential pricing?
Xiang: Yeah, we see that all the purchased grades from China from India from the European market has seemed to have been a huge pull on the Atlantic basic crude from China. So we see Brent futures have risen back above Dubai swaps despite signs that the Opec+ group will extend the production cuts.
Tom: And what about China's demand for sour crude, because it's traditionally been a very large market for sour crude. A lot of MidEast Gulf producers now very much have China in their sights. Are you seeing any kind of increase in demand for sour crude out of China?
Xiang: We see that Rongsheng has played a major role in the global market, especially the sour grade because it has started to hit the market. It purchased a lot of crude, mainly the sour grade for delivery in December, January, and February. So which also, you know, affected the sour grade prices on global market.
Tom: So all this crude is heading to China. I mean, it occurs to me that Chinese stock levels became a problem over the summer. China has a very, very large storage system but it appeared to run out of storage capacity over the summer. With all of the world's crude seemingly heading East again, are storage constraints going to be a problem over winter as well?
Xiang: I think it will not be a problem in that the storage constraint will go very high, that will run out of the China's tank space again because we will have new additional tank space. This quarter, we will have over 50mn bls, it's 53mn bls of additional tank space to open, and the most significant one is the Sinopec-run Zhanjiang SPR is about 32mn bls. So it's in Guangdong province.
Tom: That's a big storage site. People love a Chinese SPR site. That's a big potential repository for crude.
Xiang: Yeah, because it can help China to store more crude. Because now, you can see that in November we see the onshore crude looks like rising again. So there are concerns as you talked, you mentioned there will be concerns that inventory will be run out again. But from my viewpoint, I think although the inventory [is] increasing, but crude throughputs are very high. Like in October, the Chinese crude throughput stayed above 14mn b/d. That's the fifth consecutive month. So I think for a lot of the year, Chinese refinery runs were higher than the US rise this year, which has, you know, let China to become the biggest globally refiner that all the crude are heading to Asia and especially to China.
Tom: So China has overtaken even the US in terms of its refinery runs, more crude is being refined in China now. Potentially, that's kind of a powerful indication of how the two countries have handled Covid-19 differently. And obviously, there are still some very distressing numbers, and infection rates, and deaths coming out of the US. But I suppose one of the things I'm curious about is a lot of crude is being refined in China. Is it all being consumed in China? What is product demand like? What is gasoline demand, diesel demand like? Because, of course, the amount of product that's being consumed by an economy is usually a very powerful indicator of the underlying health of that economy. Is it all being consumed in China?
Xiang: No, actually, no. I think currently the product storage also very high. And this year, I think the gasoline margins is weaker than the diesel margins. So that's why we see the state-owned enterprises, they prefer to export more gasoline than diesel.
Tom: Potentially a problem for the rest of the world's refiners, right?
Xiang: Yeah, that's true. But for Sinopec, I think, of course, they have the advantage of state-owned...of the gasoline stations which can help them to earn more money. So like in these key markets of East and South China, Sinopec will keep its high runs which will support throughput rates because the margins. Like in Shandong you'll see it's very hard because now from...
Tom: Shandong is the major, major refining hub in China. That's where all their refineries are, right?
Xiang: Yes, and, you know, currently for most of the contacts, they decided that other margins have retreated to negative.
Tom: Negative margins in the refining hub. Yeah.
Tom: A worrying sign.
Xiang: But they may not... You know, although the margin is negative but it may be very hard to the independent refineries to take maintenance around the Spring Festival. They do rarely take maintenance in April and May. So although we see...
Tom: Right, half of the lunar new year.
Xiang: Yes, yes. Although we see the [crude] differentials rose sharply, they have to buy to meet their immediate demand. So...
Tom: It's becoming a more competitive crude market, I guess, more demand coming back into the market. So how does that leave us in China looking at 2021? I mean, what is the state of demand like? Are we getting to see China still as the largest source of incremental demand in the global oil market?
Xiang: Yes, we mentioned the independent refineries, they will not take maintenance around the Spring Festival, so from that part, there will be demand from the private sector. And from the state-owned enterprises, I think like PetroChina, like Sinopec, they will continue to run their refineries harder and they have to seek to hit their annual operating target. Besides this, I think there's also another factor that will support the oil demand is the expansion of new capacity. Because we feel...
Tom: It's amazing to think that China... Sorry, I'm sorry. It's amazing to think that China is adding refining capacity while elsewhere in the world, refineries are having to shut.
Xiang: That's where we will see, you know, a huge refinery is Shenghong, 320,000 b/d, Shenghong refinery. And Xinhai will also double its capacity. So we will see the refining capacity from Asia-Pacific, from Asia will account for about 45% of the total global growth in processing capacity. And most will come from China. This will also support the oil demand I think from Chinese part. And also with more vaccine used globally, I think the global demand of oil, as well as products, will also support, you know, the consumptions, support the price.
Tom: That's, I guess, a relatively encouraging note to end on. I think that's all we've got time for. But thank you very much for sharing your insights with us, Xiang.
For more insight, analysis, and a plethora of Chinese data such as crude import volumes, apparent demand, refinery runs margins, crude storage capacity, consider subscribing to our Argus China Petroleum service. You can find more information on this service at www.argusmedia.com. Thanks for tuning in, and we look forward to your joining us on the next episode of The Crude Report.