Commodity Online
Beyond the price reform factor, Barclays sees several key energy policy shifts this year which could support China's crude imports:

--A purported tax change, if implemented, could boost apparent gasoline demand as blend stocks become unprofitable;

--A national highway toll waiver may encourage driving during 20 days of official holiday, supporting gasoline demand;

--The changing landscape for China’s independent teapot refineries (government mandates on closure of those with capacity of less than 40 kb/d, as well as granting licences for crude imports) is likely to see a strong call for crude oil over traditional fuel oil imports;

--The policy on aviation continues to produce exponential growth. Last year, the NDRC approved 24 new airports and expansion projects to be commissioned over the coming years. The Chinese Civil Aviation Administration estimates passenger transportation volumes to grow by 9.4% y/y.

As a negative factor, however, efforts to fight pollution in major cities may present a risk to oil demand if they lead to limits on car ownership or manufacturing around cities. While attention on the issue may lapse, pollution will remain an increasingly difficult challenge to the leadership.

Import figures

Chinese crude oil imports in January came in close to record levels at 5.9 mb/d, higher y/y by 7.5% (412 thousand b/d). The increase in appetite for crude comes on the back of Petro China’s throughput, boosted by new refining projects at Maoming Petrochemical, Jinling Petrochemical and Hohhot Petrochemical that came online in Q4 12.

Along with this, there was a negligible amount of refinery maintenance carried out by Sinopec and PetroChina during January which has helped to keep runs elevated. Chinese commercial crude oil inventories have also mirrored the healthy appetite, falling for the fourth straight month and down 1% m/m over December.

Although refinery appetite for crude has remained elevated and continues on the strong trajectory of previous months (imports grew by 8.4% over Q4), underlying product demand is not as robust. Gasoline inventories have jumped by 5.47% over the month to 7.4 mt (the highest levels in the past two years). Part of the mismatch between refinery output and domestic consumption of gasoline is due to seasonal factors (with weather in particular influencing consumption in December and January).

Also product stocks are building ahead of the holidays to meet winterdemand. Gasoil inventories have also seen a build, increasing by 18% to 9.48 mt (the highest levels since June).

Preliminary indications for product demand in the first half of February suggest end-users have moderated usage further given the Lunar New Year holiday. Gasoil consumption in particular has been affected given the temporary suspension of road and mining projects, as well as idle trucks during the holiday period.

Barclays expects these consumption numbers to pick up over the second half of January, and normalise over March.

Projection

“Overall, we expect China’s oil demand to grow by 5% in 2013, backed by a solid economic recovery and the ongoing addition of new refining capacity. We also see the government’s move to raise retail fuel prices as positive for Chinese refinery runs on the back of improved margins, although it remains a partial relief.” the Bank added.

The Chinese government has hiked retail gasoline prices by 300 Yuan/mt (+3.5%) and retail gasoil prices by Yuan 290/mt (+3.8%) this week, and while this essentially offsets the downward revisions to gasoline and gasoil executed in November, when compared to the change in the price of the crude oil basket, it only implies a lifting of the extreme pressure on margins rather than a complete relief.

To put this in context, the last time retail prices were hiked in September, the 22-day rolling average of the Chinese crude basket (Cinta, Dubai and Brent) was up 7.6% (and the price hikes to gasoline lagged by 100 basis points, while for gasoil it lagged by 40 basis points).

This time around, the crude basket has increased by 5.4%, with the change in gasoline prices lagging by 190 basis points, and the change in gasoil prices lagging by 160 basis points.