China's weak refining margins may mean 'lower appetite' for crude: Vitol's Muller

China's refining margins at the lowest this year may mean a "lower appetite" for crude oil by the world's largest energy consumer in the next few months at a time when demand in Asia usually peaks, the head of Vitol Asia said Nov. 5.

The recent slide in China's refining margins --in some cases turning negative-- is probably due to destocking and higher runs of about 1 million b/d in the third quarter than a year earlier likely due to "high demand expectations, perhaps unreasonably high," Mike Muller said on the Gulf Intelligence daily energy podcast.

"As a consequence now we've seen this translated to higher-than-expected stocks. And if stocks are unseasonably high, the only consequence is you push domestic prices down, you push refining margins down and you force run cuts."

This is the time of year when oil demand in Asia usually peaks while demand in the Western Hemisphere tends to slow because of reduced driving activity and winter conditions. China's fuel sales figures on a weekly basis actually don't show signs of economic weakness, with diesel sales in line with expectations and jet demand "robust, exceeding expectations," Muller said. He noted Singapore Airlines just added five extra flights a week from Singapore to China.

"They don't tend to do that unless they're confident they will sell those seats," the Vitol trader said. Gasoline is the only fuel showing signs of weakness, but that's because of a recent public holiday, he said. "So it goes without saying that China will either need to continue running its refineries and building stock at low margins or there will be a drop in runs and that will manifest itself into lower appetite for crude and that's highly visible since China is such a significant global importer of crude oil," he said. "Those are the signs of softness that the market has been detecting."

Gross refining margins among key Chinese independent refiners collapsed further in October to negative $3.39/b, down by $9.12/b from September, according to assessments by S&P Global Commodity Insights. Margins at China's main state-owned refiners faired better, with gross margin assessed at $5.68/b in October, resulting in a $5.38/b month-over-month decline.

Analysts at S&P Global expect Chinese crude runs in the fourth quarter to remain almost unchanged from the previous quarter amid various headwinds, a significant deviation from the historical quarter-over-quarter growth level of 300,000 b/d-600,000 b/d. On an annual basis, they still forecast a substantial rebound in China's crude runs by 1.26 million b/d in 2023 supported by a 6.1% rise in total oil demand for 2023, a growth of 940,000 b/d year over year.

Market stability

China's independent refineries will have to further cut crude throughput in November as limited availability of crude import quotas created a feedstock supply squeeze, a trend that is likely to continue until new import quotas for 2024 are issued by Beijing, S&P Global Commodity Insights reported on Nov. 3, citing analysts and other sources. From the beginning of November, the average utilization rate at Shandong's independent refineries fell 1.98 percentage points to 65.5% as of Nov. 1, from a week earlier, mainly due to weak refining margins, according to data from local energy information provider JLC.

The Platts-assessed Dated Brent crude benchmark dropped to $88.02/b on Nov. 3, the lowest since Aug. 31, according to S&P Global Commodity Insights data.

Even with the war in Ukraine and the Israel-Hamas war, "the truly amazing thing is how steady the oil markets are," Christof Ruhl, senior research scholar at the Center on Global Energy Policy at Columbia University, said on the podcast. "We have little fires everywhere including in the regional oil producing region of the Middle East and the oil price hovers around $85/b to $90/b. And that is a very big vote, a sign that we are really well supplied with oil in the longer term and the medium term."

Risk premiums have narrowed in oil and natural gas since the onset of the Israel-Hamas war, Muller said. Early interest to obtain crude oil outside the Strait of Hormuz has also waned, dissipating that risk premium, he said. Hormuz is a critical chokepoint through which 30% of the world's seaborne oil transits.