Sinopec oil product stocks rise as company awaits post-COVID-19 demand rebound in China

The state-owned Sinopec's oil product inventory is rising amid weak sales and the company is now preparing for a rebound in domestic demand once the current wave of COVID-19 ends, executives said during the company's Q1 results call on April 28.

The world's top refiner, with about 6.1 million b/d primary capacity, was hit by high feedstock prices and weaker demand in March and April, resulting in high inventory costs which squeezed Sinopec's cash flow, the executives said.

Huang Wensheng, vice president and secretary to the board of directors, said the company cut refinery utilization rates in March to 85% from over 90% in January and February as demand slowed in China amid the resurgence in COVID-19 cases.

The option to export excess product is also limited as Beijing slashed the company's quota to export oil products by 64.3% year on year during the first round of allocation for 2022.

The company keeps relatively high inventory levels, which would help meet an expected sharp rebound in demand once the COVID-19 wave passes, Huang added.

Sinopec refined 5.24 million b/d of crude in the first three months, up 2.7% year on year, according to its Q1 financial results.

The output of oil products rose 4.6% on the year in Q1, exceeding the increase in throughput as the company changed its yield to produce more oil products from petrochemical products whose margins were falling.

Challenges

As crude prices rose by over 50% year on year in Q1 and logistics got disrupted amid COVID-19, inventory took a larger proportion of Sinopec's cash flow, said Song Zhenguo, deputy head of Sinopec's finance department.

Sinopec usually holds crude inventory at levels adequate to meet 15 days' throughput and oil product stocks for 20 days sales, officials had said in late March.

As a result, the company's cash flow stood at Yuan 187.32 billion ($28.36 billion) on March 31, down 15.6% from Yuan 221.99 billion on Dec. 31, 2021, the quarterly result showed.

The company cut its utilization rate by eight percentage points to about 76% in April, data from S&P Global Commodity Insights showed, as most of the Sinopec refineries are located along the coastal cities where logistics and manufacturing activity were hit hard by COVID-19-related movement restrictions.

The company aims to process 258 million mt (5.2 million b/d) of crude in 2022, up 1.1% from 2021.

"We expect oil product demand to gradually recover in Q2 with the pandemic under control," said Li Li, deputy head of Sinopec's operation management department, adding that the company expected a year-on-year growth in demand for 2022.

S&P Global's Platts Analytics estimated that China's oil demand would fall 6% year on year in Q2 and said that it is uncertain whether the reduction in Q2 will be compensated by recovery in H2 if Beijing continues with its zero-COVID strategy.

Rising capex boosts upstream output

Upstream, Sinopec reported the first year-on-year growth in domestic production since Q2 2020 as it had boosted spending in the sector for over a year.

The company produced 61.6 million barrels of domestic crude in Q1, up 0.6% year on year, while its capex on exploration and production rose 69.4% to Yuan 15.25 billion, the earnings report showed.

Its natural gas output rose 7.7% to 8.89 Bcm over the same period.

China's crude production rose 4.4% on the year to 4.17 million b/d in Q1, and gas output gained 6.6% to 56.95 Bcm, according to data from the National Bureau of Statistics.

Sinopec set its budget for the sector at Yuan 81.5 billion for 2022, up 66.8% year on year as the government called for stabilization of domestic crude production and increasing gas output.

Sinopec had also built 76 hydrogen refilling stations by the end of Q1, compared to the target of 1,000 hydrogen refilling stations with an overall service capacity of 200,000 mt/year by end 2025.

Huang said it would still take time to grow demand for hydrogen as a transportation fuel, and he expected the demand to rise rapidly in five years.

Sinopec's H1 2021 operation results

*Oil, gas outputs from both domestic and overseas

Source: Company report

Sinopec's capital expenditure (Unit: Bil Yuan)

Source: Company report

Sinopec's domestic production (million mt)

^ Divide Sinopec's output by China's total production

Source: Company report, the National Bureau of Statistics