China Oil Demand as Good as It Gets

China's record crude imports in February are most likely as high as they will go, at least for the coming months, as rising prices, refinery maintenance and slower economic growth curb demand.

China swallowed a record 5.95 million barrels per day of crude last month from overseas, continuing a recent strong run of imports.

Since November China has racked up three of the four strongest months on record for oil imports, and at a time when economic growth is moderating, given the dual need to tackle high domestic inflation and weakness in key export markets such as Europe and the United States.

The conventional thinking is that Chinese refiners have been filling storage in recent months, a view borne out by the seeming disconnect between imports and implied oil demand.

Implied demand was 9.71 million barrels a day in February, with this figure calculated by adding net fuel imports to refinery throughput.

However, if you add together crude imports, net imports of refined products and domestic oil output, you get a figure some 670,000 barrels a day north of the implied demand.

This means China has most likely been filling storage tanks, although it's impossible to know for certain as the world's second-largest oil user rarely publishes inventory data.

But if you assume the extra crude oil imports are going into storage, the question then becomes how likely is this to continue?

If history is any guide, it appears the Chinese buy crude for storage when they assess oil prices to be relatively cheap.

This is no longer the case, with Brent having gained more than 26 percent since its low in October last year to trade around $126 a barrel.

This means that cargoes arriving in March and April would have been purchased at considerably higher prices than those bought for January and February, given the lag of up to two months between order and delivery.

This makes it less likely that the Chinese will continue to fill stockpiles, and more likely they will wait until prices moderate again.

Take away the extra demand for storage and suddenly China's oil imports are more likely to be around 5.3 million to 5.4 million barrels a day.

And this figure could also drop in coming months if the upcoming refinery maintenance season is as heavy as a Reuters poll suggests.

Refinery runs are forecast to drop to their lowest in 31 months in March, the poll found.

This means crude imports are likely to trend lower, while net imports of refined products may trend higher temporarily, to make up for lost domestic output during the maintenance season.

There is also the chance that Chinese refiners have been stocking up on crude just in case the Iranian situation gets worse and there is a genuine supply disruption.

Part of the rise in oil prices in recent weeks has been put down to escalating tensions between Iran and the West over the Islamic republic's nuclear programme, which it insists is for peaceful purposes while Europe and the United States fear Tehran is developing atomic weapons.

So far, U.S. and European pressure has forced as many as half a million barrels a day of Iranian crude out of the market, with the possibility that this could rise to more than 1 million barrels a day when Europe bans imports from Iran.

While Saudi Arabia and other producers have been able to pump enough to cover the shortfall, whether Iran's total of about 2.5 million barrels of exports could be made up is another matter.

Chinese refiners are likely being prudent in building up a cushion of inventories and there is a risk this could continue even in the face of higher crude prices.

However, if the Iran tensions ease, or even stabilize, it is likely that China's crude imports will trend lower in coming months.

This doesn't mean they will collapse or even turn negative in year-on-year comparisons, but it does mean that import growth will slow to levels more consistent with the International Energy Agency's forecast for China's total product demand to rise by 371,000 barrels a day over 2012.