In its latest weekly report, shipbroker Gibson said that “on February 1st China will enter the year of the tiger. 2021 saw total Chinese crude imports at 512.98 million tonnes, down by 5.4% vs 2020’s 542.39 million tonnes, marking the first fall in imports since 2001. The decline in imports last year occurred despite an increase in refinery runs, with Chinese refinery output up 4.3% year-on-year, reaching 703.55 million tonnes. Nonetheless, lower refining runs were seen towards the end of the year, as mobility restrictions and “Zero Covid” policies reduced demand for products and thus refinery throughput. Heading into New Year, China is facing multiple challenges in its petroleum sector, ranging from the energy transition, refining policy and the demand outlook. All of which may reshape China’s prominent role in the oil and tanker markets”.

Source: Gibson Shipbrokers

According to Gibson, “the first-round of 2022 crude oil import quotas have been reduced by 11% from 2021’s quota for the period to 109.03 million tonnes. This comes as China’s refining sector is under pressure to consolidate and cut excess refining capacity with a cap of 20m b/d (1000mmt/year) by 2025. Current capacity is estimated at 990 mmt/year. This leaves only 10 mmt/year of additional capacity to add so future sector growth is limited. However, utilisation rates are expected to increase as older “teapot” units run at lower rates compared to more efficient and newer facilities”.

The shipbroker added that “in the short term, refiners have been requested to limit emissions ahead of the winter Olympics. This includes options such as cutting throughput by 30% or capping utilisation rates at 70%. Demand for gasoline and jet fuel would typically be higher this time of year due to Lunar new year celebrations and increased travel but renewed mobility restrictions have put this in doubt. Jet fuel demand could be 15-20% lower in January as domestic flights are cancelled, theoretically offering support to jet fuel exports. However, in terms of oil product export quotas, the first-round of 2022 volumes is down 56% from 29.5 million tonnes in 2021, leaving just 13 million tonnes for exports of cargoes such as gasoline, gasoil, and jet fuel. LSFO is the main exception to that, with export quotas for product increased by 30%”.

“So where do the latest developments leave the tanker market? For the last 20 years, continuous growth in crude imports provided steady support for tankers as other regions fluctuated. In the short term, reduced import crude quotas are likely to drag on freight levels, particularly for VLCCs and Suezmaxes. At the same time, product tankers will experience fewer Chinese export cargoes which is negative for vessels trading in the East. Longer term, as China transitions to a lower emission economic model and the shift in the country’s refining industry begins to gather momentum, the tanker market might not enjoy the same level of demand growth that many had come to rely on. Nonetheless, whilst these developments seem somewhat bearish for the tanker market, fundamentally China is still the strongest source of crude tanker demand and future imports will remain considerable and robust for many years to come”.

Marex Media