China’s oil imports plunge as Beijing cuts supplies to dirty local oil refineries. Oil shipments to the world’s largest crude importer fell 20% in June and July, year-on-year, mainly because the government reduced import quotas for independent refineries that fail to meet environmental standards.
The government’s decision to release some of its oil stocks to contain oil prices and inflation is contributing to the decline. Declining imports by the world’s second-largest consumer of oil after the United States could dampen the recent upward trend in oil prices.
Chinese crude oil imports from January to July fell 5.6 percent on the year to 301.83 million tonnes, customs officials said. The decline has accelerated in recent months. China’s oil imports in June fell to 40.13 million tonnes, the lowest level for the year. Imports in July remained low at 41.24 million tonnes. The figures for the two months represent declines of about 20% year over year.
In 2020, China stepped up its crude imports to take advantage of falling prices and boost energy security, with a record 53.18 million tonnes in June last year. The government has since reduced its purchases.
The market reacted strongly to the latest Chinese oil import data. During August 9 trading in New York, the first-month contract for West Texas Intermediate (WTI) crude oil futures fell 4.6% to $ 65.15 per barrel, the highest figure. down for about two and a half months.
Beijing is reducing oil import quotas for independent refineries, also called teapot refineries, in Shandong and other provinces. In 2015, the government opened up its imports of crude oil to these small factories, as well as state-owned refineries, to promote competition in the oil market. Teapot refineries have driven the growth of Chinese oil imports in recent years, accounting for 20-30% of total demand. Shandong Province is the country’s oil hub and is home to many of these small independent refineries.
But they largely produce low-quality petroleum products using old and dirty facilities. The government has become more concerned with the quality of its products and its environmental performance, reducing its import quotas in the second half of 2021 by 35% compared to the previous year.
“China is cracking down on refineries that fail to comply with environmental regulations as environmental awareness increases,” said Mika Takehara of Japan Oil, Gas and Metals National Corp. (JOGMEC). The country is trying to reduce its carbon footprint, according to Takehara.
The government’s decision to release some of its oil stocks is also contributing to the drop in China’s oil imports. The government has been supplying oil to the market since July, Bloomberg News reported. The move aims to keep inflation low by reducing the country’s oil import bill. In a similar move in early July, Beijing released part of its copper and aluminum stocks.
China’s economic recovery could also weaken due to a resurgence of COVID-19 cases, further reducing demand for crude imports. “COVID travel restrictions are dragging the economy and stifling energy demand,” Takehara said.
Coordinated production cuts by major oil-producing countries, combined with economic recovery in many industrialized countries, pushed WTI futures to $ 75 per barrel in mid-July, up some 60 % since the beginning of the year. But the benchmark crude price has since fallen back to around $ 67.
To complicate matters, the unrest in Afghanistan has blurred the outlook for oil production in the Middle East. At the same time, there are growing fears that the economic recovery is peaking in the United States, the world’s largest consumer of oil.
A continued decline in China’s oil imports could “ease the upward pressure on crude prices, which have remained stuck at high levels,” said Tatsufumi Ogoshi, senior economist at Nomura Securities.