COLUMN-Weak China oil imports contrast with modest demand growth: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, July 16 (Reuters) - How do you reconcile the apparently contradictory facts that China's oil demand and refinery runs hit four-month highs in June while imports of crude fell to the lowest in nine months?
The picture becomes even more obscure if you look at the first-half numbers for the three main indicators available to gauge China's oil demand.
Take crude imports first. They were 5.39 million barrels per day (bpd) in June, down 4.4 percent from May and the weakest since September.
Over January to June crude imports were 5.57 million bpd, a decline of 1.4 percent from the same period last year.
Turning to refinery runs, they were 9.64 million bpd in June, a gain of 10.8 percent from the same month in 2012. In the first half they were 9.55 million bpd, up 4.1 percent on the same period last year.
Finally, implied oil demand, calculated by adding refinery throughput to net imports of refined products, rose to 9.94 million bpd in June, up 5 percent from May and 10 percent from the same month in 2012.
First-half oil demand was 9.82 million bpd, up 3.4 percent on the same period in 2012.
What we have in essence is declining crude imports being contrasted with modest growth in oil demand and processing.
China's domestic crude output doesn't provide an answer, having risen a modest 2.7 percent in the first five months of the year to about 4.17 million bpd, which translates to roughly an extra 62,000 bpd over January to May.
That leaves commercial and strategic inventories as the most likely explanation, but this is always a grey area because China doesn't report actual levels for stocks.
What is known is that commercial crude inventories have been rising since March, as the official Xinhua news agency does report percentage changes.
In May, stocks were up 4.75 percent from the prior month, in April they gained 0.14 percent and 2.2 percent in March.
Part of the explanation then for June's soft crude imports but robust rise in refinery processing can be put down to using up crude inventories as plants returned from maintenance carried out in April and May.
But overall it appears that China may have actually added to crude inventories in the first six months of 2013.
Assuming domestic oil output was steady in June at the 4.17 million bpd achieved over the first five months, and adding in the crude imports gives a total of about 9.74 million bpd of available oil over the first half of the year.
With refinery throughput at 9.55 million bpd, this implies that as much as 190,000 bpd was added to inventories over the January to June period.
This in turn suggests that China will be in no hurry to boost crude imports in coming months, given it already appears to have ample stockpiles.
It's more likely that crude imports will be tied to actual domestic consumption, and this throws up some interesting possibilities for the second half.
With China's economy losing some momentum, particularly on the industrial production side, this is likely to weigh on demand for diesel, the main transport fuel, and naphtha, the building block for plastics and synthetic fibres.
Gross domestic product expanded 7.5 percent in the second quarter, the ninth quarter in the last 10 that expansion has weakened. Industrial output growth slowed to 8.9 percent in June from May's 9.2 percent, a sign that the economy was slowing more toward the end of the second quarter.
On the other hand, vehicle sales rose 11.2 percent in June and are up 12.3 percent year-to-date, which should boost gasoline demand.
Assuming the trend toward slower industrial activity continues for some months and vehicle sales remain robust, this will leave Chinese refiners with some choices.
Will they keep refinery runs high in order to meet the expected increase in gasoline demand, and try and export surplus diesel? Or will they keep runs steady and meet any increase in gasoline consumption by curbing exports?
Export figures indicate they could do either.
In the first five months of the year, China exported about 115,000 bpd of gasoline, an increase of 59 percent over the same period in 2012, while diesel exports were about 80,800 bpd, a 241 percent leap.
It will likely come down to the prevailing margins in Asia for products, but even if processing profits are strong enough to encourage China to export fuels, this alone is unlikely to be enough to spark a rebound in crude imports.
Crude imports should grow in the second half, but it may be by a smaller margin than expected, assuming domestic oil output and net fuel imports are much the same as in the first half.
(Editing by Tom Hogue)