May 5, 2023
Much attention has been paid to the easing of COVID-19 restrictions in China and the implications this may have for their economic growth and subsequent oil demand in the country. The deficit for China’s crude balance is forecast to deepen, reaching -11.7 million b/d in August. Although a widening crude deficit generally results in higher imports, the situation could be more complicated for China as the country has significantly built up its inventory levels during the COVID-19 period. Comparing China’s net crude imports (JODI Oil) and crude balance (Kpler), we have observed a large gap between the two in 2019 and 2020, when crude demand was reduced by over 10% while imports were not notably disrupted. Therefore, China’s crude inventory is calculated to have been built up by 850,000 b/d and 1.13 million b/d in 2019 and 2020, respectively. The recovering economic activity has seen a moderate drawdown from the inventory since 2021. The first two months of 2023 saw the draw on the inventory levels reaching an average of 646,000 b/d, limiting the amount of crude China would otherwise need to import.
We note that OPEC+’s decision to cut crude production could have the impact of increasing prices on the front end of the curve, leading to a continued backwardation structure. This would likely incentivize further drawdowns of existing inventory, similar to what we have observed in China to start the year. Along with increased Russian crude exports into China, which reached a record high of 2.7 million b/d in February, these market factors could cause headwinds for VLCC demand in the 2H of 2023. As a result, we forecast TD3C (Eco, Non-Scrubber) to average US $45,725/day in 2H 2023. This is broadly in line with our views set out in January’s 2023-2027 Tanker Market Outlook report. In continuation of our original views, we forecast a strengthening VLCC market emerging in 2024 alongside a favorable supply side situation and a recovering economic outlook as central banks will likely introduce monetary stimulus to support oil demand growth.
Figure 1: China’s Crude Balance Figure 2: China’s Calculated Inventory Change
Source: Kpler, JODI Oil, McQuilling