China is ramping up oil purchases amid record-breaking demand destruction caused by the Covid-19 pandemic and a supply overhang that has knocked prices and futures contracts down to levels not seen in decades.

The Middle Kingdom’s oil imports rose 4.5% in March year on year to 9.68 million barrels per day (bpd), China’s General Administration of Customs data shows.

China’s January and February oil imports averaged 10.47 million bpd, while its first quarter (Q1) oil imports averaged some 10.2 million bpd, representing a 5% year on year rise.

The rise in imports comes amid the worst global health crisis in over a century, causing China to post its weakest Q1 economic performance since at least 1992 at -6.9% compared to the same period a year earlier.

China, the world’s largest oil importer, is nonetheless seizing the opportunity of plunging prices to fill up its strategic petroleum reserves and commercial stockpiles, buying that may help or may not help a further collapse in Brent crude oil prices until global demand is expected to start to resuscitate in the third quarter (Q3).

Prices for global oil have collapsed by more than 60% since the start of the year due to a one month long oil price war between Russia and Saudi Arabia, the world’s second and third largest oil producers. Covid-19 lockdowns affecting around one-third of the world’s population, meanwhile, have killed demand for the fuel.

The lockdowns will result in around 25-30 million barrels bpd of oil demand being wiped out this month, with slightly lower projections for May and June as certain countries are expected to start to exit their lockdowns. In 2019, global oil demand averaged around 99.5 million bpd.

A Chinese oil and gas worker in a field in Xinjiang, northwestern China. Photo: Twitter

To complicate market matters but sweetening the deal for Chinese stockpiling, Saudi Arabia last week offered deep discounts to its customers in Asia, its largest market.

The discount offers came just days after it agreed to an historic OPEC+ oil cut deal that will remove nearly 10 million bpd from global oil markets in May and June, with lower agreed cuts for the rest of the year and into 2021.

Oil benchmark Brent crude has recently traded in the upper $20s per barrel, while on Monday US oil bench mark NYMEX-traded West Texas Intermediate (WTI) saw futures contract prices fall for the first time into negative territory as US producers run out of storage facility space.

It marked the first time in history WTI futures dropped below zero, continuing the US crude benchmark’s super contango momentum. Most of China’s oil, however, is imported from Saudi Arabia, Russia, and other OPEC producers, so it will not immediately benefit from WTI’s price collapse.

In 2019, China’s crude oil imports from Saudi Arabia stood at 1.7 million bpd, or 16% of total crude oil imports, according to the US Energy Information Administration (EIA).

Russia, for its part, was the largest non-OPEC source of China’s oil imports in 2019, averaging 1.6 million bpd, or 15% of its total imports. Brazil overtook Oman as the second biggest non-OPEC source of China’s oil imports, increasing by less than 0.2 million bpd to average 0.8 million bpd for the year.

Moreover, China’s crude oil imports from Saudi Arabia, rose 26% in the first two months of 2020 from a year earlier, while oil purchases from Russia gained 11%.

Chinese oil workers welcome an incoming shipment of the fuel in a file photo. Photo: Facebook

The US, which produces and exports mostly more valuable light sweet crude from shale production, saw its oil imports to China drop in 2019 due to trade war tensions that saw China impose tariffs on US goods including crude oil and liquefied natural gas (LNG).

As such, US oil exports to China last year averaged only 133,000 bpd. The US didn’t export any crude oil to China in January and February this year. However, US oil exports to China are likely to pick up later this year as Beijing starts to grant tariff waivers on certain US products including crude oil.

China’s total oil reserve capacity is a tightly guarded state secret and Beijing does not publicly disclose data on inflows into both strategic and commercial inventories.

As such, import estimates are usually calculated by subtracting the amount of crude oil processed by the country’s refining sector from the total volume of oil available from imports and domestic production.

Energy consultancy Wood Mackenzie said in March that China’s crude stock, including strategic and commercial petroleum reserves, could reach 1.15 billion barrels in 2020, equivalent to around 83 days of its domestic oil demand.

China will complete building the second phase of its strategic oil storage in 2020, Li Fulong, National Energy Administration (NEA) head of development and planning, said in September.

Li said at the time that China, a non International Energy Agency (IEA) member, had enough oil to last around 80 days, slightly less than the 90 days recommended by the Paris-based IEA for its members.

By way of comparison, US strategic petroleum reserves, now around 727 million barrels, are usually equivalent to at least 90 days of oil demand over any given period.

An oil storage facility in China. Photo: Facebook

Commercial US reserves as of April 20 rose to 503.6 million barrels, or about 6% above the five year average for this time of year, according to the US Department of Energy (DOE).

Wood Mackenzie said that China could build its crude reserves by up to 300,000 bpd from March to the end of this year, but it likely won’t be enough to lift oil prices since limitations in storage capacity will soon kick in.

The consultancy predicts China’s storage capacity could hit 90% toward the end of this year.

China’s near-overflowing oil storage will thus represent another sign that the growing oil supply overhang is far from over, meaning prices will remain depressed even as China’s economy slowly starts to recover from the pandemic’s damage.

It also indicates that the recently inked OPEC+ deal was too little, too late and only postponed by a month (or even less) full global oil supply capacity, resulting in more oil production shut-ins including in the world’s top oil producer the US.