After oil prices fell in 2014, China became the saving grace of oil exporters. Since 2014, China has been the world’s largest net importer of crude oil and oil products. (It became the largest importer of crude oil in 2017). Even though some economic indicators showed the Chinese economy was being to slow in 2016, the country’s oil imports remained high—between 6 million and 8.5 million barrels per day.
China used the cheap oil prices during that time to fill its strategic reserve of crude oil. It also allowed independent Chinese refineries (sometimes referred to as “teapots”) to import crude oil on their own, outside of state contracts, and to export refined products.
Many market watchers feared that a sudden decision by the Chinese government to stop buying crude oil for storage or to halt the independent refinery business would cause a sudden drop in global oil prices. However, China has done neither. Its oil consumption rose in 2017, despite higher oil prices.
That could all change in 2018. Over the past two years, independent Chinese refineries relied on low oil prices to secure big margins on the export of refined products. Those margins have dropped considerably just in the past few weeks as oil prices have risen into the mid to high $60 per barrel. It is possible that these refineries will slow their refining runs and process less crude as their profit margins have been cut nearly in half.
As long as China continues importing at high rates, there is opportunity for U.S. producers to export more oil to China. In fact, U.S. exports to China are growing. In November they reached a high of 289,000 barrels per day, according to Clipperdata. This is a tiny fraction of the Chinese market, which imported 9.01 million barrels of oil per day the same month. However, it is a big boost for the U.S. that still outlawed most oil exports just a couple years ago.
U.S. oil exports will likely become more enticing to Chinese refineries looking to make the most of their decreasing margins. Not only is the U.S. crude oil benchmark (WTI) still cheaper than the European benchmark (Brent), but U.S. shale oil producers are still selling their oil at a discount. Infrastructure constraints coupled with an oversupply in the United States of the light oil they produce mean that these producers have to continue to sell their oil for less than the WTI benchmark. Their cheaper prices could be exactly what the independent Chinese refineries need to keep their oil margins up.
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