China to boost Iranian crude oil import again

China has reduced purchase of Iranian crude oil over the past couple of months because of difficulties in price negotiations. The nation's Iranian crude oil imports in January fell 14% from a month earlier and decreased 5% from a year ago.

The following chart shows Japan's monthly Iranian crude oil import prices. CIF Japan Iranian crude oil prices are usually lower than Brent crude oil prices, since cheaper heavy-grade oil accounts for 40-45% of Japan's entire Iranian crude oil imports. However, Iranian crude oil frequently exceeded Brent prices during 2011 due to the Libyan civil war and strong demand from Japanese electricity sector.

It is natural that China claims to reduce contract prices for 2012 when Iran is likely to face further difficulties of selling its crude oil due to the Western sanctions.

The price negotiation is said to have finished in mid-February and Iranian crude oil shipments heading for China are expected to recover to the previous level of more than 550,000 barrels per day by April. Thus China's reduction of Iranian crude oil imports will fade after the first quarter this year.

China's Iranian crude oil import may surge because of the competitive prices. Increasing crude oil supply from other producers such as Saudi Arabia, Iraq, Libya and Russia may also help China to find its necessary oil easily.

Meanwhile, forecasts to the growth of China's crude oil consumption in 2012 are relatively moderate. Actually, statistics data for January showed sluggish results.
Chinese refiners' crude oil inputs in January rose only 1.9% from a year earlier to 36.2 million tonnes. The January growth rate was much lower than the 2011 average of 4.9%.

But the less growth in January is not strange because lunar new year holidays belonged to January this year. The one-week holidays belonged to February last year. China's crude oil imports in December fell 3.4% from a month earlier to 21.92 million tonnes, then imports rebounded to 23.41 million tonnes in January. Since imported crude oil is usually processed next month, China's crude oil inputs in February is likely to rebound.

Annual growth rate of China's apparent oil demand was 11.5% in 2010 and was 6.0% in 2011, while that in 2012 is expected at about 5%.

The country's gross domestic product increased 10.3% on year in 2010 and rose 9.2% on year in 2011. Oil industry players in China anticipate that the 5% growth of oil demand will meet the country's desired 8% GDP growth in 2012.

The 5% growth of oil demand may require about 8% growth of crude oil import because growth of China's domestic crude oil output is estimated to stay less than 2% on year. About 400,000 bpd of crude oil import may be added to the 2011 average of 5.1 million bpd.

India and EU buy up Iranian oil

Sanctions against Iran involving the suspected nuclear weapons development is being strengthened, thus the country's economic situation is said to become harder.

Actually, how many Iranian crude oil exports are being restricted by the sanction?

I have told about reduction of Iranian crude oil imports by Japan and China. However, Iran's crude oil productions are not decreasing significantly. The decrease pace looks staying less than a natural decline that is caused by a lack of fresh investments.

Organization of Petroleum Exporting Countries estimates that Iran's crude oil output in January was at 3.48 million barrels per day. The volume was decreased only 180,000 bpd from a year ago.

China is reported to be reducing Iranian crude oil import since the beginning of this year because of tough price negotiation. Iran's crude oil shipment heading for China in January was estimated at about 250,000 bpd. It was drastically decreased from the last year's average of 550,000 bpd.

Iran's crude oil production, however, did not fall apparently despite such severe reduction of demand.
Meanwhile, media reported that India had lifted imports of Iranian crude oil in January 37.5% from a year ago to 550,000 bpd. India seems to be absorbing excess Iranian oil instead of China.

India's average Iranian crude oil import was 310,000 bpd in 2011, according to the International Energy Agency.

India is facing difficulties to receive payment from Iran for foods and other stuff. Barter trades between these nations may be expanding.

On the other hand, IEA estimates that average Iran's crude oil export to the European Union in 2011 was about 600,000 bpd.
Iran's average crude oil shipment to EU in the first half of 2011 was 450,000 bpd, while that in 3Q in the year rose above 700,000 bpd. It possibly rose further toward 800,000 bpd during 4Q.

Industry sources estimate that Iran's crude oil shipment to EU was about 650,000 bpd in January 2012.

Since mid-2011, EU has been the largest buyer of Iranian crude oil instead of China. Especially Italy and Spain seemed to rely on Iranian oil more, and that was thought the main reason why EU failed to begin the import ban immediately.

Recent increasing crude oil productions in Libya and Iraq are likely to allow European countries to reduce dependence to Iran.

Is China electricity demand dull?

Electricity supply capability is in a risky situation in Japan because of a lack of nuclear power supply and a strong demand boosted by the recent cold weather.

Cold weather surely boosts electricity use in China as well, but news about the power shortage are not heard despite industrial activities resumed after the lunar new year holidays.

Is current electricity demand in China sluggish?

Total electricity generation capacity in China as of the end of 2011 was about 1.05 billion kilowatts. Thermal power was 760 million kw, hydroelectricity was 230 million kw and rest of capacities were nuclear power and wind power. Generation capacity was increased by 90 million kw during 2011.

Meanwhile, total supply of electricity in 2011 rose 12% from a year ago to 4.6 trillion kWh, according to the China National Bureau of Statistics. Electricity supply capability in China recorded shortage of 30 million kw in the highest demand season in 2011.

China Electricity Council forecasts that the country's electricity demand in 2012 is likely to increase 9.5% on year. The figure is lower than the previous two years when growth rates scored double digits.

In 2012, about 85 million kw of new generation capacity is scheduled to be installed. However, the council forecasts the new capability is not enough to meet the increasing demand and 30-40 million kw of supply shortage is likely to be seen in the peak demand season this year.

In spite of the forecasts, the electricity supply capability in China seems to be enough to meet demand at present.

On the other hand, the deficit situation at Chinese electric power companies due to cheaper electricity prices and higher coal prices was solved.
Local coal prices are sinking and the government hiked official electricity sales prices in December.

Chinese power companies mainly burn coal for thermal power generation. Regional Bohai-Rim coal prices have declined from RMB 853 per tonne in November to RMB 782 per tonne in early February.
It means that electric power companies are no longer suffering losses and not hesitant to generate electricity.

If current electricity demand in China is rising 9.5% from a year ago, power supply in February could be about 350 billion kWh. The maximum power demand is likely to stay at around 910 million kw in that case. Power companies seem to have enough spare capacity.

Declining regional coal prices also suggest that electricity demand remains weaker.
Anyway, strong demand of gas oil for power generation at factories caused by electricity supply shortage is not likely to be seen in the near future. Such gas oil demand was often seen in China in the past few years.