China Oil Storage Likely to Slow from Breakneck Pace: Clyde Russell

The big question for oil markets in the second half of 2012 is whether China will continue building its stockpiles at the same unprecedented rate of the past six months.

China, the world's second-largest crude user, imported over 600,000 barrels per day (bpd) more than what it refined in the first half, a surplus that's equivalent to about Turkey's daily consumption.

Net crude imports totalled 5.58 million bpd in the January to June period, while domestic output averaged 4.1 million bpd in the January to May period.

Assuming domestic output was steady in June, the total crude available in China in the first half is likely to be 9.687 million bpd.

However, refining throughput averaged only 9.07 million bpd, leaving a crude surplus of 617,000 bpd.

This means that a total of about 112 million barrels went into commercial and strategic storage in the first half, an amount 53 percent higher than what the International Energy Agency said may be the total stockpiling for the whole of 2012.

This is a staggering build up of oil inventories, especially considering what is known of China's plans to build stockpiles.

The first phase of China's strategic storage was 102 million barrels and was completed around 2008, while the second phase was slated to be 170 million barrels, and was said to be ready for filling by the end of last year.

At the same time commercial inventories have also been rising as refiners commission new units, with up to 660,000 bpd of capacity slated to come on stream this year, according to Reuters calculations.

Assuming 25 days of inventory for new capacity, about 16.5 million barrels will be needed for refining additions.

Take the second phase of strategic storage and likely new commercial inventories together and it appears that the surplus oil imported in the first half is about 60 percent of what should be the maximum needed for storage this year.

Now, it's quite possible that more storage has been built than originally projected, given lobbying by local governments for more projects to improve oil supply security.

But equally well there have to be serious questions as to whether China will continue to import more than 600,000 barrels of crude a day above what it refines in the second half.

It is possible that China's crude consumption will rise in the second half, especially if the authorities' efforts to stimulate growth bear fruit.

Apparent oil demand, which takes refinery throughput together with net fuel imports but excludes stockpiling, slipped to a 20-month low of 8.96 million bpd in June, and averaged 9.5 million bpd in the first half.

The IEA estimates China's 2012 oil product demand will reach 9.758 million bpd, meaning demand would have to average about 10 million bpd over the second half.

That appears slightly optimistic given the economy has yet to show that the second quarter gross domestic product figure of 7.6 percent was the bottom of the cycle and that growth momentum will be regained in the second half.

But if apparent demand does hit 10 million bpd over the second half, this means that net imports of both crude and refined products need to be about 6 million bpd.

Net product imports were about 340,000 bpd in the first five months, and assuming this remains the average it means second half crude imports would need to be about 5.66 million bpd, slightly above the 5.58 million bpd of the first half.

The question then becomes whether China will continue to add to storage in the second half.

There may be as much as 70 million barrels of storage still to fill, and if that was topped up in the second half it implies potential extra demand of 380,000 bpd, a surplus considerably lower than what was done in the first half, but still high by historic standards.

There is also less concern that China will find it hard to replace crude that it used to source from Iran, removing a geopolitical factor that may have been behind the large imports of the first half.

In fact, the Iran worries must have been serious in China as the nation's buying of surplus crude peaked at a time when Brent oil reached its year high above $128 a barrel.

The Brent high came at the end of March, when cargoes for May delivery would have been booked.

China's May imports of crude were highest ever, at just over 6 million bpd.

The outlook for the second half for China's crude imports may become the reverse of the first, with lower storage but increasing consumption.

But it may also be a story of a subdued third quarter as the economy regains momentum followed by a strong fourth quarter.