【SCI View】China Crude Oil Processing Volume May Be Affected

China Crude Oil Processing Volume May Be Affected by Sea Freight Rise

Currently, nearly 50% of China’s imported crude oil comes from the remote Middle East, and most of these crude oil is transported by sea. Currently, most of the crude oil tankers in China are VLCC whose DWT are around 200-300kt. Therefore, the freight rise of VLCC tankers will deeply influence the refined oil market in China.

During the National Day holiday, the U.S.’s sanctions on China supported the freight price of VLCC tankers to keep growing. According to statistics, on October 11, Baltic Exchange Dirty Tanker Index reached 1,941, up 63% from seven days before, and that index revealed the continuous increase of crude oil freight in the last 30 days. On September 11, the index was only 696, and on October 11, the index reached 1,941, up 178.88% M-O-M. Meanwhile, the rent of large crude oil tankers also surged recently.

Due to the surge of freight, the cost at state-owned and independent refineries in China increased. Moreover, the current international crude oil prices trend down, making the profits at refineries decline further. Accordingly, there is a rumor that in December, Sinopec will decrease its crude oil processing volume by 1,000kt to balance the profit and cost. According to SCI, there are a few pieces of evidence supporting that rumor. However, the details about that decrease are still uncertain.

SCI views:

First, whether Sinopec will decline its crude oil processing volume in December still needs further confirmation.

Second, if Sinopec is going to decline its crude oil processing volume, its influence on China’s refined oil supply is limited.

If Sinopec decreases its crude oil processing volume by 1,000kt in December, the gasoline and diesel output at Sinopec’s refineries will drop by around 390kt and 310kt respectively. However, the current total monthly crude oil processing volume at Sinopec’s refineries is over 20,000kt. Meanwhile, the overall operating rates at PetroChina’s refineries and independent refineries are likely to stay largely stable in Q4, 2019, and the demand for refined oil in Q4, 2019 is likely to be moderate. Therefore, the overall supply of refined oil will stay stable.

Third, it is possible that the freight will resume to a rational level soon. Source says that the Sino-U.S. trading negotiation shows an optimistic trend, giving support to the decline of sea freight.

Fourth, SCI reckons that even if Sinopec declines its crude oil processing volume, the overall refined oil supply will not become short. However, in December, due to the drop of temperature, the diesel supply may become relatively short for a short period, and because of the sluggish refined oil market in Q4, 2019, a few participants may hype and stimulate in the market to raise the refined oil prices.

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