(The views expressed here are those of the author, a Reuters columnist.)
LAUNCESTON, Australia, Sept 3 (Reuters) – There is a narrative in the crude oil market that demand is recovering from the shock of the coronavirus pandemic, so producers who cut production earlier can now bring more supply back into the market.
While there is evidence to support the view that demand is higher than at the peak of the pandemic-induced lockdown in the second quarter, questions remain about whether demand will be sufficient to absorb a likely increase in supply.
Much of the optimism remains centered on a recovery in Asia, particularly China, the world’s largest crude importer, which has been importing record volumes in recent months.
Of course, August will be another strong month for China, with Refinitiv Oil Research forecasting imports of 12.11 million bpd.
That would be slightly above July’s official customs figure of 12.08 million bpd, but below June’s record 12.94 million bpd.
If August’s official imports match Refinitiv estimates, it would mean the May-August period was the four-month high for monthly imports, underscoring how dependent the crude market is on China for some level of demand . Novel coronavirus pandemic.
It’s also no secret that China’s surge in imports in recent months has largely been the result of heavy opportunistic buying during a brief price war between top exporters Saudi Arabia and Russia in March and April.
With oil prices falling to their lowest point in 22 years, Chinese refiners have used their financial muscle to suck up the world’s available oil.
The oil has been arriving since late May, in such quantities that tankers have been forced to wait up to four weeks to unload at Chinese ports.
As of the end of August, more than 90 million barrels of crude were still waiting on tankers outside Chinese ports, while another 17.5 million barrels of crude destined for China were waiting in the regional oil trading hub of Singapore, Refinitiv said.
Assuming these cargoes are unloaded in September, that alone could keep China’s imports high in September, even though new crude volumes are falling.
Crude oil shipments to China in August were 7.93 million bpd, down from 8.2 million bpd in July and well below the second-quarter average of 11.87 million bpd, Refinitiv said.
The data seemed to suggest that the flow of crude oil that has been pouring into China in recent months may have started to fall back to more normal levels starting in October.
While that still means that imports could exceed 10 million b/d, it does mean that the crude market will lose the demand of as much as 2 million b/d it has grown accustomed to.
Weakness in rest of Asia
Will a rebound in demand elsewhere in Asia make up for China’s 1-2 million barrels per day loss?
While there are some signs of recovery, current data suggest otherwise.
India, Asia’s second-largest importer, imported 3.6 million bpd in August, up from 3.44 million bpd in July and June, Refinitiv data showed.
While this is a recovery, it’s worth noting that pre-coronavirus demand in India was around 4.1 to 4.7 million bpd, meaning demand remains constrained.
Given that India is still battling the outbreak, it may take longer for demand in the South Asian country to fully recover.
Japan is normally Asia’s third-biggest importer of crude oil, but it could swap places with fourth-ranked South Korea due to weak demand.
Refinitiv data showed Japan imported about 2.35 million bpd in August, up from 2.09 million bpd in July, but still well below normal levels of about 3 million bpd.
South Korea imported about 2.29 million bpd in August, down from 2.74 million bpd in July and below the pre-coronavirus level of about 2.9 million bpd.
Japan and South Korea are still struggling to contain the coronavirus, putting a question mark over how quickly their crude demand will recover.
Production rose sharply in August after OPEC+ members eased collective production cuts by 2 million bpd to 7.7 million bpd, betting that demand will recover faster than crude can be put back on the market.
Whether they are correct may depend on the extent of the pullback in Chinese demand from October onwards. (Editing by Lincoln Fest)