CLYDE RUSSEL: Rising Russian crude supplies to China forces rethink of imports

Launceston, Australia — Is it time to rethink how the market views China’s imports of crude oil to take into account the rising share of Russian supplies to the world’s biggest importer?

A more accurate picture of China’s crude imports, and the likely impact on prices, may be gained from looking at the trend of arrivals from suppliers other than Russia.

This is because Russia has largely become disconnected from the global crude market, given that its oil is being sanctioned by Western buyers, is subject to a Group of Seven nations price cap and relies increasingly on a limited pool of buyers.

Russian crude export volumes have held up since Moscow’s February 24 invasion of Ukraine, but only because China and India have stepped in to buy steeply discounted Russian oil.

If the view that Russian crude is no longer a factor in prices for the rest of the world’s oil is correct, excluding Russian supplies from China’s import data may provide a more accurate picture of the state of the market.

China’s oil imports have been rising in recent months, partly in anticipation of a reopening of the economy from pandemic controls and partly because Beijing has granted more refined product export quotas to allow refiners to access the high margins for fuels in Asia, especially diesel.

But while China’s crude imports have been rising, a greater share appears to have been captured by Russia. So, while the country’s call on supplies from other producers has been going up, it has risen more slowly than overall imports.

For example, Refinitiv Oil Research data put China’s total imports at 8.75-million barrels per day (bpd) in June, the lowest for 2022. For November imports were 11.42-million bpd, the highest for 2022, according to Refinitiv. If imports from Russia are excluded, it shows that June imports were 6.97-million bpd and November’s 9.52-million bpd.

Seaborne imports

The increase for imports from all sources in November over June was 2.67-million bpd, but the total excluding Russia was 2.55-million bpd.

Refinitiv data shows that in the preinvasion period of January 2021 to February 2022, China’s seaborne imports from Russia averaged about 590,000 bpd.

In the postinvasion period up until December last year, they averaged about 857,000 bpd, an increase of 267,000 bpd, or about 45%. As an aside, China’s pipeline imports from Russia have remained steady at about 1-million bpd.

Due to the EU ban on crude imports from Russia now in place, China could be able to boost purchases from Russia. China can deploy tankers to fetch oil from Russia’s western ports and transport it either through the Suez Canal or around Cape Town.

This raises the possibility that Russia’s share of China’s crude imports will rise even higher. In turn this may mean that Chinese refiners don’t have to ramp up purchases that much from other suppliers, even if they are boosting their overall level of imports.

But the global crude market isn’t a zero-sum game, and European refiners that previously relied on Russian crude are now buying alternative grades, with rising imports from the Middle East and Africa.

This realignment of trade flows will have an impact on how various crudes are priced, with grades being bought by Europe to replace Russian Urals crude likely to be supported.

But if China is sourcing much of its additional crude from Russia, it may mean that it doesn’t drive prices for other grades of oil as much as it did in the past.

Reuters