Record crude imports and refinery processing in the first quarter give China's oil sector the appearance of exceptional strength, but in this case looks can be a little deceiving.
This isn't to say that China's crude demand and refinery throughput is weak in any shape or form, rather that there are factors that make it look stronger than it actually is on a fundamental basis.
Looking at the refining sector first, March saw 11.19 million barrels per day (bpd) of crude being processed, just below the record high for December and 5.9 percent above the same month last year.
In the first quarter, official figures show that 11.21 million bpd of crude was processed, up about 590,000 bpd, or 4.5 percent, from the same period last year.
But not all of that extra 590,000 bpd of fuel production has been consumed, with customs data showing some of the increase in refinery throughput has been exported.
Exports of refined products were 11.96 million tonnes in the first quarter, up 22 percent from the same period in 2016.
Using the BP Plc
conversion factor of 8 barrels per tonne of products, it works out that China's fuel exports in the first quarter were about 1.06 million bpd.
This is about 203,000 bpd more than the 857,000 bpd exported in the first quarter of last year.
This means that of the 590,000 bpd increase in refinery production in the first quarter of 2017, about 390,000 bpd was available on the domestic market, with the balance being exported.
It's also the case that China's inventories of refined products have been growing, with commercial stocks gaining 15.3 percent in February from the prior month to reach the highest since at least 2014.
These higher inventories are likely the result of lower growth in domestic fuel consumption.
Overall, what the numbers show is that China's domestic fuel demand is growing, but just not as strongly as implied by the record refinery throughput in the first quarter.
CRUDE IMPORTS BOOSTED BY STORAGE
It's much the same story for crude oil, with China importing record volumes in both March and the first quarter.
March imports were 9.17 million bpd, well above December's previous record of 8.57 million bpd, while first-quarter imports reached 8.49 million bpd, up 15 percent on the same period last year.
With crude oil imports
at an all-time high, it certainly suggests robust demand, but there are a few factors that temper the bullish picture.
The first is that higher imports are partly replacing lower domestic crude production, with official figure showing output was 3.89 million bpd in the first quarter, down 6.8 percent from the same period in 2016.
Another factor is the amount of crude being placed in either commercial or strategic storages.
Exact volumes aren't disclosed by the authorities in Beijing but an estimate can be made by adding crude imports to domestic output, and then subtracting the amount processed by refiners.
On this basis, 12.38 million bpd of crude was available for refining in the first quarter, but only 11.21 million bpd was actually processed, leaving a surplus of 1.17 million bpd.
This 1.17 million bpd of surplus crude is most likely to have flowed into both commercial and strategic storages.
It's also a higher figure than the 805,400 bpd of surplus crude from the first quarter of 2016, meaning that the pace of inventory building has picked up in the first quarter of this year.
While the outlook for inventory builds in coming quarters is uncertain, it does seem more likely that exports of refined products may ease, given that the authorities have lowered the amount of fuel that can be exported under the quota system.
This may lead to a moderation in growth in crude oil imports and refinery throughput in coming quarters.
By Clyde Russell