China Has Refined Taste for Oil

Crude-oil investors have reasons to like China these days. Oil refiners aren’t so enamored.

According to trade data out Saturday, the world’s second-largest consumer of oil after the U.S. imported 18% more crude in October from the year before, faster than its 9% growth so far this year. As crude gets cheaper, China is on the bargain hunt.

The trading arms of its state-run oil majors have snapped up cargoes in international markets in recent weeks, and these will likely register in even higher import levels in the coming months. Oil bulls can take some consolation that these purchases prevent the crude price from falling more rapidly.

Yet even as China imported more crude, its refineries were converting it into diesel or fuel oil for re-export. Its net exports of refined oil products swelled to a record high in October, almost twice the level of the previous monthly record in July, says Citigroup ’s Ivan Szpakowski.

Some of these exports can be chalked up to an industrial slowdown in China that has suppressed demand for diesel. Still, overall oil consumption hasn’t been so bad this autumn. Government stimulus helped it rise 7% year over year to a seven-month high in September, according to London-based consultants at Energy Aspects.

The bigger problem is that China has built more refineries than it needs. These processed 9% more volume in September than the year before, outstripping consumption growth. Though its state oil giants have somewhat curbed their expansion plans, eight refineries have added or will add capacity this year, with three more next year, notes Mr. Szpakowski.

This overcapacity is getting pushed onto the rest of Asia, just like in other commodities such as steel. That has hurt refiners especially near China, such as South Korea’s S-Oil and SK Innovation . And there is likely more pain, as refining margins temporarily buffered by cheaper crude get competed away.

Though China is inflicting pain on the products market, crude-oil bulls should also be worried. If the country cuts its refining capacity down the road, it won’t need that much crude. And while some of the imported crude may get gobbled up by China’s strategic petroleum reserve, there are constraints there, too.

The world’s engine of oil-demand growth is buying crude more to satisfy its refinery complex than its underlying consumers and businesses. There isn’t much solace in that.

WSJ