Analysts: China may be causing 'missing barrels' effect

China's growing oil inventory and improved refinery utilization rate could explain the so-called missing barrels in global supply and demand analysis, said Credit Suisse First Boston Corp. (CSFB). It said many of the dislocations between supply, demand, and price are attributable to abnormal crude trading patterns by China's refining industry.


A build in China's oil inventory, coupled with a change in the way China supplies its refineries, could explain the so-called "missing" barrels phenomenon currently plaguing global oil demand and supply analysis, according to a report by Credit Suisse First Boston Corp. (CSFB).

"These missing barrels are the difference between calculated demand and supply numbers and reported inventory moves," CSFB said.

In 1998, the International Energy Agency referred to an unaccounted-for discrepancy between the supply and demand figures it reported as "missing barrels" (OGJ, Nov. 23, 1998, p. 36).

CSFB also said changes in China's refinery system could be partially responsible for persistently high oil prices despite rising Organization of Petroleum Exporting Countries supplies.

CSFB credits the major change in China's refining industry to its improved utilization rate. PetroChina Co. Ltd. and Sinopec, which control nearly all of China's domestic refining capacity, have boosted their refining output to maximize profitability and follow the plans set out for the companies' privatizations. This year, China's refining output has grown by 440,000 b/d from 1999, or a utilization rate increase to 80% from 65%.

At the same time, China's healthy economy has triggered a "seemingly insatiable demand" for crude in China, causing demand to grow 9% year-over-year. As a result, China's crude imports increased more than 700,000 b/d so far this year, implying a crude oil inventory build of 260,000 b/d, or 71 million bbl, the first 9 months of 2000.

CSFB said most of the extra OPEC crude has been routed to the Far East rather than Europe or the US. Japan and China have been the main recipients of OPEC crude, with Japan receiving 5.5 million b/d and China 4.5 million b/d. But unlike China, Japan's crude imports were down 40,000 b/d the first 9 months of this year.

CSFB reports that China plans "only modest increases" in domestic refinery runs next year, which suggests that the strong demand pull China exerted on the global crude oil market this year is not likely to be repeated in 2001.

New construction has and will continue to be partially offset by the closure of smaller, less efficient, and sometimes unreported plants, said the company. Most of the new investments in China's refining system will be made into secondary processing units needed to meet tougher new fuel specifications, and not to raise overall refining capacity. The investment in secondary units should increase China's ability to process heavier and more sour crudes. China's refining system is configured to process domestic crudes, which are generally lighter and sweeter than OPEC's recent incremental output.

The effect of this non-optimal configuration for crude input during a time of rising utilization has been a large increase in China's imports of low-sulfur crude and an unusual level of support for sweeter global crude price markers, particularly for Brent and West Texas Intermediate crude.

Much of the large planned incremental investment into China's refining system is likely to be into secondary processing units needed to meet tougher new fuel specifications, not to raise overall refining capacity. CSFB predicts that, should crude demand slow in China, incremental Middle East supply would start to make its way west, rebuilding depleted visible inventories in the US and Europe.

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