China takes advantage of Global Crude Glut, beats USA in crude processing
- International oil prices fall to more than two-decade low -FT
- Brent tumbles on investor concerns over coronavirus pandemic and global crude glut
- Prices have weakened sharply because of a combination of events triggered by a collapse in global demand.
- For the first time ever, Chinese refinery has surpassed refinery crude processing in the United States
The knock-on effect has been a supply glut and a worldwide shortage of storage space for oil.
China’s independent refiners began to restore some curtailed production in March, taking advantage of the cheap oil amid the oil price ware war as the country started to lift lockdowns and ease travel restriction measures gradually.
At the same time, U.S. refineries are lowering utilization rates as demand for gasoline is at its lowest in decades while people work from home and practice social distancing.
According to the chart below by OilX, Chinese refiners are cranking up runs as the country emerges from the two-month-long lockdown. In contrast, refinery runs at U.S. refineries are plummeting, to the point that China is currently processing more crude oil at its refineries than the world’s top oil consumer, the United States.
In the week to April 10, refineries in the U.S. processed an average of 12.7 million bpd of crude. This compares with 13.6 million bpd a week earlier and 14.9 million bpd three weeks ago, the EIA said in its weekly inventory report last week, which showed a record crude oil inventory build of 19.2 million barrels.
“We are seeing fast and furious gasoline demand destruction. The latest data reveals demand levels not seen since spring of 1968,” AAA spokesperson Jeanette Casselano said at the beginning of last week.
On Monday, AAA said that refinery rates dipped to 69 percent, a level not reported by the EIA in more than a decade.
“Despite lower run rates amid low demand, gasoline stocks increased. Total U.S. stock levels measure at a record 262 million bbl – the highest weekly domestic stock level ever recorded by EIA, since it began reporting the data in 1990,” according to AAA.
"This is an unprecedented demand drop. Nobody in their lifetime has seen anything like this," said James McNally of Third Bridge Group.
The collapse in physical demand for crude products like petrol and jet fuel has left storage hubs at capacity or, as one trader put it: "They're close to the brim."
Storage at US oil hub Cushing has already grown to more than 15 million barrels in the past month - and is expected to soon be at capacity for the first time ever.
"Coronavirus is rewriting the rules of the global economy in front of our very eyes," said Adam Vettese, analyst at eToro.
"With oil demand virtually non-existent, this quite amazing sell-off is almost entirely down to fears over storage."
HOW BAD WILL THIS BE FOR THE ECONOMY?
No one is making money at today’s prices. Companies are laying off thousands of employees and dramatically scaling back drilling. In some cases, they’re shutting down existing wells, which can permanently damage oil fields. U.S. shale producers were already struggling financially before the pandemic hit, and many more are expected to file for bankruptcy if rock-bottom prices persist.
While the price of petrol is linked to the wholesale price of oil, it is driven by competition.
That means that what motorists pay is not directly linked to crude. Instead, suppliers control the prices they sell petrol at.