China crude demand and Iranian supply disruptions in focus
Front-month Brent futures retreated to below US$75/bbl on Thursday (17 October), from the high of US$81/bbl last Monday. Although the potential Israeli threat to Iranian oil facilities has diminished considerably, crude loadings from Iran’s major export terminals (almost all of which heads to China) declined in the first two weeks of October. We hear that volumes fell under 1 mmb/d, much lower than the usual 1.6 mmb/d. That said, export capacity from Kharg Island, where 90% of Iranian crude is exported from, is up to 8 mmb/d, meaning it should be easy to compensate for the lull in the first half of October (as discussed in our Iran Alert - Iran’s energy infrastructure at a glance: Let’s get the facts right on 6 October 2024).
However, there is still nervousness about what/when the Israeli attack on Iran would be. As the risk premium evaporates for now, the market has shifted focus back to softening demand fundamentals. Both OPEC and the IEA this week trimmed their outlooks for global oil demand growth in 2024. We have also revised down our global oil demand growth estimates and projections for 2024 by 130 kb/d from last month to 1.27 mmb/d (as discussed in our Flash Alert - IEA OMR: Global demand outlook largely unchanged; IEA overstating non-OPEC 3Q output but underestimating 4Q potential on 15 October 2024).
In line with our expectations, China’s crude runs recovered by over 350 kb/d m-o-m to around 14.3 mmb/d in September. It is worth flagging that data for July-August looked suspiciously low and we think at least 100 kb/d of crude processing was missed out, potentially due to under-reporting by smaller refineries. We believe the under-reporting continued in September.
The start of 4Q 2024 has seen little improvement in runs, with lower rates among NOCs and mega independents offsetting the rise among smaller independents this month. Overall, we expect China refinery runs to average 4.6 mmb/d in 4Q 2024, some 400 kb/d higher q-o-q but flat y-o-y. But given the current demand outlook and feedstock issues surrounding independents (risks to Iranian supply, fuel oil tax change, etc), our projections for 4Q 2024 runs face 100-200 kb/d of downside risk. We expect crude runs in January-February 2025 to inch up on the back of holiday demand and replenished export quotas.
Crude imports into China are on track to rebound by about 300 kb/d m-o-m in October, but remain lower y-o-y due to sluggish demand for refinery processing. However, we hear that feedstock availability for Shandong independents has tightened since September. Meanwhile, refiners outside of Shandong (e.g. one or two major players in Dalian) have increased their intake of Iranian crude. This, together with the disruptions to Iranian crude loadings earlier this month, has pushed up prices of Iranian crude. We understand that Iranian Light is now being offered to Chinese buyers at US$4/bbl discounts to ICE Brent on a delivered basis, compared to the US$5-6/bbl range seen in the past few months.