China Crude Spree to Last into March, April Easing

The blistering pace of China's crude imports will continue in March as oil firms replenish stocks and new refineries run at high rates, but soaring international prices should stymie imports toward the end of the month.

China is the world's second-largest oil consumer and its demand growth is one of the biggest drivers for global crude markets. Its implied oil demand matched record levels in February, when customs data showed China imported a record 5.95 million barrels per day of crude oil, up 18.5 percent on the year.

"It's possible that we will continue to see some of the momentum from February as the March customs figures would show cargoes arriving that were mostly booked in the first half of February, before the oil price spiked," said a Beijing-based crude trader.

Brent crude rose over 10 percent in February to end the month at $122.66 per barrel. That cut deep into processing margins for state refiners, which will have scaled back bookings and will likely import lower volumes for end-March and April.

The higher-than-expected imports in February came even as top refiner Sinopec Corp slashed oil imports from Iran by some 285,000 barrels per day (bpd) due to a commercial dispute.

China bought more than it cut from Iran in the spot market, picking up cargoes from the Middle East, Russia and Africa for loading in January and February to build a cushion to deal with the Iran pricing dispute, trade sources have said.

Besides the spot cargoes, Sinopec has raised its 2012 term crude imports with top oil exporter Saudi Arabia as well as some other Middle East countries, industry sources have also said.

China added 360,000 bpd of crude refining capacity in the fourth quarter of 2011, part of its expansion programme to meet rapidly rising fuel demand. The imports for the plants accounted for a large proportion of the year-on-year increase in February.

Refineries typically use the first few months of the year to rebuild crude stocks, and that, too would have added to imports.

"China typically builds up crude inventories from December to February and crude stock piles begin to fall from March after spring plowing starts and industrial activities accelerate," said Dai Jiaquan, researcher with CNPC, parent of PetroChina .

China's state owned refiners have since March scaled back on operations as poor margins hit, and are likely to draw on their fuel stocks to meet rising seasonal demand if the government delays a much-awaited fuel price hike.

"Now refineries are really cutting back on runs, which may be reflected in the April import figure," said the first trader.

A Reuters poll found crude throughput at China's top refineries will drop to a 31-month low in March with daily production nearly 10 percent lower than in February, as many plants undergo maintenance, some earlier than scheduled to trim deepening losses.

China last raised gasoline and diesel prices by 3-4 percent on Feb 8. Although crude oil prices have since gained 9.6 percent as of Friday, well above a trigger point of 4 percent for another fuel price hike, the government decided not to raise retail prices last week.

STOCK FILL

Analysts say a 540,000 bpd gap between crude output plus net imports and refinery throughput in the first two months suggests a move by China to fill its strategic petroleum reserves (SPR).

"China seeks to fill SPR when crude prices moderate, and decisions related to February imports were generally made in December, before oil prices accelerated above $110/bbl," according to a JP Morgan research note on Monday.

"But with the heightened uncertainty related to Iran, this strategy may have changed recently, with SPR filling continuing apace."

China has been pumping oil into new reserve tanks in its landlocked northwest since September. An estimated 17 million barrels of crude oil, or a daily rate of around 190,000 barrels, have flowed into both commercial and strategic tanks recently completed in the remote Xinjiang region and Gansu province, industry sources have told Reuters.

The International Energy Agency said in its February report up to 79 million barrels of new storage could be available in 2012, which would imply an extra 220,000 bpd of crude demand should China decide to fill them steadily during the year.

Liu Tienan, head of the China National Energy Administration told reporters last week China would "push forward" with building phase-two strategic oil reserve sites.

Asked whether it is a good time to fill SPR tanks at current oil prices, Liu said "It depends on market condition."