China crude oil imports still exceed demand

China's crude oil imports in May rose 8.9% from a year ago to 6.16 million barrels per day, according to the General Administration of Customs. Meanwhile, the number fell 6.5% from the previous month's record imports of 6.81 million bpd.

 Although Chinese crude oil imports are slowing from April, it still remains at relatively high level. If domestic crude oil production in May stayed at same level as Jan-Apr, total crude oil supply in the month would be about 10 million bpd.

Chinese refineries should increase their throughput level by 8% on year in order to process the entire supply. However, it is impossible because accumulated crude oil processing in the first four months in 2014 only increased by 1.8% on year. Moreover, Chinese refineries are typically shut their facilities in May and June for maintenance prior to summer demand season.
Therefore, crude oil imports in May still seems including procurements for strategic reserve.

On the other hand, Chinese trade surplus in May surged to 35.9 billion dollar, the highest monthly surplus since January 2009. Processing trade also recorded two consecutive months growth on year.

These data suggests that energy demand in the country may be underpinned in the near term.　But customs data also showed a contrary story that China's petroleum products export exceeded import again following March. It shows that petroleum products are oversupply in China.

OPEC crude oil excesses further due to sluggish imports by US and China

Twelve member nations of the Organization of Petroleum Exporting Countries have maintained their total crude oil production below the target at 30 million barrels per day ahead of its general meeting that is scheduled on 11th June.
Moreover, demand for OPEC crude oil is likely to decrease since imports by two major players - the United States and China may be slowing down in the near term.

Estimated OPEC crude oil production has been below the quota of 30 million bpd since September 2013 except for February.

Global demand for OPEC crude oil is limited due to the increasing supply from non-OPEC producers. Recently, imports by the U.S. is declining sharply and forecasts of Chinese demand is not bright. Petroleum shipments by OPEC members are falling from last year's levels between early April and early June, according to Oil Movements' survey.

In the U.S., regional petroleum demand is slowing down while domestic crude oil production is growing steadily. Moreover, petroleum demand in the country is expected to decrease on year toward the late this year.

The U.S. has been mainly importing OPEC crude oil into the Gulf of Mexico (PADD3) area. However, the region currently does not have enough room to take waterborne crude oil imports since large crude oil flow from inland boosts the stockpile level to the record high.
An additional crude oil pipeline from inland to the gulf area is scheduled to start operation in the near future, so this tendency is likely to be accelerated.

While losing the U.S. market, OPEC anticipated that growing demand from China and other Asian emerging market will offset it. But crude oil processing in India continues to level off after reaching to about 4.5 million bpd in late 2012. Meanwhile, growth of crude oil throughput in China in 2013 remained at 3.3% from a year ago, then slowed to 1.8% growth on year in the first four months period in 2014.

China imported average 6.26 million bpd of crude oil during Jan-Apr, up 11.5% on year, according to the General Administration of Customs. But the high imports caused half million bpd of excess crude oil against processing.

Accumulated excess crude oil during the first four months was more than 10 million tonnes, while commercial crude oil stockpile in China was estimated to gain by about 1.7 million tonnes during the same period. Therefore, 8.3 million tonnes of excess crude oil was likely used to fill up the strategic reserve.

In April, the strategic reserve increased by more than 5 million tonnes, so China's crude oil imports for physical demand in the month were actually fell about 1% on year despite the record high customs data.

It suggests that Chinese crude oil imports will be flat or lower than previous year's level after completing the building of strategic reserve. Thus the country is unable to make up for shrinking demand from the U.S.

On the other hand, some OPEC members like Iraq and Iran are aggressive to increase their crude oil supply. Libya is also expected to resume its supply promptly if current domestic turmoil is solved.

What will other members do? If they maintain the current output levels, total OPEC production will far above the target quota. The excess supplies could depress global petroleum prices as they once were.

Japan's energy demand shows no apparent sign of reaction against tax hike

One and half months have passed after the Japanese government raised consumption tax from 5% to 8%. Many people predicted an aggressive consumption prior to the tax hike and a possibility of reaction after April.

Although Japanese energy demand has been in downward tendency in the past couple of years, both petroleum and electricity demands rose on year in March. Then demand slipped again after April.

However, can we say those were rush demand and reaction against it? Especially, electricity demand significantly fluctuates by weather conditions. I think April data are not enough to be recognized as reaction.

Petroleum demand recorded year-on-year decreases during March and May last year, and is falling further between April and mid-May in this year. Even though, current monthly decreases are still below the average of the past few years.

If we look back on 1997 when the last time Japanese consumption tax rate was increased from 3% to 5%, regional petroleum demand rather increased after the taxation change. Japan's petroleum demand started to decline in late 1997 in step with economic slowdown.

Energy demand in Japan seems not affected directly by the consumption tax increase, once again.

Change of U.S. crude oil stockpile situation

Increase of crude oil stockpile in the United States is depressing prices recently. Market players previously only focused on stockpile in Cushing, but the situation about the U.S. crude oil supplies seem to be changing.

The latest commercial crude oil stockpile in the U.S. nearly reached to 400 million barrels of the highest record, according to the weekly report released by the U.S. Energy Information Administration. The stockpile level is about 80% of current U.S. working crude oil storage capacity. The level was below 70% of the storage capacity in the beginning of this year.

The increase tendency of crude oil stockpile in the U.S. is of course triggered by steady growth of domestic production. Although crude oil throughput in the country has been higher level compared to several years ago, the growth of crude oil production is much faster than that.

Current crude oil supply in the U.S. is concentrated in the Gulf of Mexico area. Total crude oil stockpile as of the end of April in the U.S. rose 1.0% from a year ago. On the other hand, stockpile in the Gulf of Mexico region rose 10.1% on year, while that in the Midwest fell 18.7% from a year earlier.

The contrasting movements were caused by pipeline flows. Previously, crude oil was typically imported into the Gulf of Mexico area then transported to the Midwest through pipelines. But recently, increasing inland outputs are supplied to the gulf region oppositely.

The change of industry and social structure weigh on petroleum demand in the U.S. Fuel conversion to cheaper natural gas also accelerate the tendency.
Meanwhile, U.S. refineries are aggressive to export petroleum products, since their prices are competitive because of cheaper WTI crude oil than global index Brent. Crude oil processing in the Gulf of Mexico area is 10% higher from a year ago. Despite the refinery utilization rate exceeds 90%, larger crude oil supplies are lifting stockpile in the region apparently.

Crude oil imports into the Gulf of Mexico has declined by more than 2 million barrels per day from the levels during 2000s, but it still seems excess.

Current stockpile of crude oil in the gulf area is about 80% of the regional storage capacity. It suggests that the increasing supply through pipelines from the Midwest may cut tanker imports further or encourage the discussion to abolish the export ban for crude oil.

The Obama administration recently postponed decision on the construction of new Keystone XL pipeline that will carry more crude oil from Canada. Many people are discussing environmental issue about the new pipeline, but critical storage problem is also likely to be seen if the new crude oil flow comes into the U.S. without solving export ban.

China becomes petroleum products exporter

Chinese refineries seem to aim expanding their petroleum products export to make up for domestic slow demand. In March, the country's petroleum product export exceeded import for the first time since January 2010, according to the General Administration of Customs.

Chinese oil giant PetroChina recently announced that its refining sector earned 1.96 billion yuan of profit in the first quarter of this year compared to 1.56 billion yuan of losses a year ago. The company's sales profit in the period increased by 56.6% on year despite turnover fell 2.1% from a year ago.

The main cause of the improved profits could be new official petroleum price system that was introduced in late March 2013. Chinese domestic petroleum product prices are set by the government. Previously, these prices were reviewed based on international market prices in the past 22 business days. But the government shortened the review period to 10 business days last year. Therefore, risks of price gap between international crude oil and domestic petroleum products have been reduced.

On the other hand, I have sometimes reported that China is increasing crude oil procurement and refining capacity based on the rapid economic growth during 2000s but these supply abilities are exceeding the growth of local demand recently.
Especially, crude oil supply seems to be too much against the regional stockpile capacity, so Chinese refineries could be difficult to cut throughput rate.

Chinese refineries are likely to need maintaining relatively high crude oil processing rate because of such improved profitability and the physical constraint. The average throughput rate in the current month by major state-owned companies rose 4 percent points on year to 82% , according to Platts survey.

However, domestic demand does not show any sign of strong recovery. Although China has typically absorbed petroleum products from the international market, the nation could become a net supplier in the near future.

Is the consumption tax hike affecting on Japan's energy demand?

Economic slowdown is feared in Japan after the consumption tax hike on 1st April. Can we see any impact on the energy consumption before and after the tax rate hike?

Crude oil processing typically rises before summer and winter demand seasons, then starts decreasing toward maintenance seasons.

March is known as a time to start decreasing of demand in the cycle, however, strong fuel demand from the transportation sector sustained the crude oil processing rate last month. Transporters delivered large volume of goods for rush demand before the tax hike.

Crude oil processing in Japan had slowed down after December last year, and decreased on year in February. Although the processing rate rebounded to 3.9% on year of increase in March, it slipped again to the negative level in early April.

After the severe earth quake in March 2011, monthly electricity supply by Tokyo Electric Power Company usually has been decreased on year by the power saving efforts. But the electricity supply in February & March rose from a year ago.

Strong power demand in February was likely supported by chilly weather, however, the demand in March increased by 3.9% on year despite temperatures exceeded the previous average. Then its electricity supply in the first twelve days in April fell to 2.5% on year.

Data on the energy supply apparently show that the industrial activity in Japan increased in March, but can we assert recent declines in April as the strong reaction to it?

Crude oil throughput fell 0.5% on year against the 3.9% of increase in March, and the decrease rate of electricity supply in April is half of increase rate in the prior month.
Although we still need to keep watching the situation, it seems that there is no rapid extreme reaction after the tax rate hike.

WTI crude oil is losing internationality further

The primary index for global crude oil prices has shifted from the United States West Texas Intermediate to European Brent in the past couple of years. The reason is that WTI is losing its internationality due to the shale revolution in the north America. The tendency seems to have accelerated in this year.

WTI crude oil prices are diluting correlativity with Brent further after Keystone XL pipeline started 300,000 barrels per day of crude oil transportation from the U.S. Midwest to Texas in January this year.

Previously in the U.S., crude oil was typically imported in the Gulf of Mexico area, then transported to the Midwest, however, surge of domestic production after the shale revolution changed the situation.

Seaway pipeline reversed its transportation direction from the Midwest to the Gulf in May 2012. Its transportation quantity had increased from the original 150,000 bpd to 400,000 bpd in January 2013.

The Keystone XL pipeline which has 700,000 bpd capacity started operations in early this year, and an additional 450,000 bpd facility of Seaway pipeline is scheduled to open traffic in May. Therefore, total volume of oil transportation from the Midwest to the Gulf of Mexico will be 1.55 million bpd.

After the Keystone XL pipeline started operation, crude oil transportation between the regions seems to have exceeded the equilibrium point. Crude oil stockpile in the Midwest started decreasing sharply and that in the Gulf reached the record high level.

Since imports by tanker into the Gulf area are decreasing, the stockpile is being lifted by crude oil that comes from northern U.S. and Canada with passing through the Midwest. To buy reasonable North American crude oil and reduce tanker imports seems to be appropriate decision by Gulf refineries.

From the beginning of this year, WTI crude oil prices have been supported by decrease of stockpile in Cushing, Oklahoma despite apparent increase of the U.S. total crude oil stocks.

This situation might change if WTI's price superiority against Brent disappears. Meanwhile,  crude oil production in the U.S. is expected to increase further and imports are predicted to continue shrinking.

Status as price index of WTI may lower further, since it is more rely on stockpile in Cushing than the supply situation in the Middle East or West Africa.