Is it a pause, or something more profound? Either way, China’s crude purchases are stuttering, helping to put the oil price rally on hold. At least for now. While the world’s biggest importer took delivery of record amounts of crude in June, traders from Geneva to Houston to Singapore report that the country’s buying interest has cooled notably in recent weeks, taking away a key support for a strengthening global market for crude.
China Buys Less
Crude exports by ship to China fell by 22% between May and June loading
Source: Tanker tracking, U.S. Census Bureau data compiled by Bloomberg
Note: Persian Gulf excludes Iran, but includes Oman; Americas includes the U.S., Brazil and Venezuela; Mediterranean includes Algeria, Libya, Azerbaijan and Kazakhstan
To be clear, nobody is saying that China’s rapid recovery in underlying oil demand is hitting reverse gear, but a huge wave of purchasing in that foreshadowed the June imports had two effects. First, it swelled inventories and eased the pressure to buy now. Second, it resulted in a huge backlog of vessels waiting to unload: a logistical constraint that some traders say is curbing buying now.
“This could put pressure on oil prices in the upcoming months,” said Carsten Fritsch, an analyst at Commerzbank AG. “The pace of Chinese crude buying was unsustainable. Either domestic demand is extraordinarily strong or inventories are rising massively. Be prepared for lower figures in the upcoming months.”
Physical crude cargoes trade at premiums or discounts to regional benchmarks. When oil refineries have an urgent need for crude, real barrels command bigger premiums or smaller discounts.