13 June 2023 Kpler
The first signs of inventory draws are starting to appear onshore in China, a crucial prerequisite for the market turnaround we have been anticipating for the summer. While our data is still preliminary, the combination of restored Chinese refining capacity and rising Dubai prices will incentivise more draws in the weeks ahead.
Two months ago, we accurately predicted the peak in oil prices. Now, we seem to be facing the opposite scenario. Market sentiment has turned increasingly bearish, just as the physical market is starting to show signs of regaining strength. A major indicator of this shift is the state of oil inventories in China. According to our data, storage at Chinese floating roof tanks decreased by 20 Mbbls in late May, following a build of 40 Mbbls between April and mid-May. This drawdown has primarily occurred at commercial storage facilities rather than refineries, which are just completing their heavy maintenance period. Floating storage in Eastern Asia and in Singapore/Malaysia has also decreased from 16.5 Mbbls in mid-May to 10.5 Mbbls.
However, weak refining margins across all continents and a not-so-encouraging outlook for products cracks even during the summer suggest that oil prices are unlikely to rebound significantly. While Brent crude prices could rise from the current $80/bbl to the mid-$80s, a further increase would likely require another supply-side shock.
Despite the weak refining margins – particularly in the gasoline sector, where cracks have fallen to seven-month lows in Singapore despite Chinese gasoline inventories being 19% below their seasonal average – crude intake is expected to rise in the summer. This increase could exceed expectations if the declining trend in global inventories continues. Specifically, we anticipate Asian refinery runs to jump by 1.67 Mbd between now and May, with half of this increase concentrated in China.
Chinese onshore oil inventories, Mbbls
Source: Kpler
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