China’s refineries are using the recent drop in oil prices to increase their inventories. In April, crude oil imports stayed high, but processing fell to 58 million tonnes, or 14.1 million barrels per day. This is lower than March and down 1.4% from last year. Refinery capacity utilization fell to its lowest point since 2022, dropping to just under 74%, according to Sublime China. Despite domestic oil production being 1.5% higher than last year, crude oil inventories rose by nearly 2 million barrels per day in April.

Apparent Oil Demand and Market Concerns

When adjusted for net exports of refined products, China’s apparent oil demand in April was 5.5% lower than the previous year. This signals ongoing concerns in the world’s second-largest oil consumption market. What we see here is a clear shift in strategy from Chinese refineries, focusing on stockpiling when global prices dip rather than increasing production. This cautious approach suggests they are preparing for future needs rather than reacting to current demands. Although import volumes remained high, processing activity decreased, indicating a disconnect between supply and actual consumption in the country. Utilization rates are now below 74%, at levels not seen since 2022. The rise in inventories by nearly 2 million barrels per day shows that storage is acting more as a buffer than a response to increased demand. Interestingly, refining output dropped even with a 1.5% rise in domestic crude production. This points to a lack of demand downstream rather than supply issues. For those closely monitoring demand metrics, April’s data shows a significant 5.5% year-on-year decline in apparent oil consumption (after adjusting for refined product exports). This suggests more than just a temporary lull and gives us a trend to consider for macro or options positions in the coming weeks.

Shifts in Refinery Dynamics

Li from Sublime China emphasizes that utilization rates are structurally lower for now. Considering the already weak domestic growth outlook and uncertainties in industrial output, we can assume that operational decisions at Asia’s largest refiner are becoming proactive rather than reactive. This situation may also impact physical market dynamics. With more oil in storage, there’s likely to be less spot buying pressure, which could affect near-term pricing and potentially slow down price differentials. The flattening risk becomes more significant for calendar and time spreads. From a positioning perspective, it’s important to monitor refined product margins, especially for gasoil and gasoline. Reduced throughput could limit exports if demand continues to stagnate, affecting how much product reaches international markets. If this occurs, margins may strengthen later in the quarter, but only if domestic consumption remains low and inventory growth slows. We rely on short-to-medium term implied volatility measures, particularly for Asian products and related ETF exposures, to understand the potential impacts of these inventory increases. If market participants view the stockpiling as a defense against global instability, it may reduce price volatility in the short term. Conversely, if renewed risk aversion emerges from China’s industrial or consumer sectors, positions should be adjusted defensively. Traders should closely monitor June and July customs and throughput figures. These will clarify whether April was an outlier or if a trend reversal is underway. For now, storage appears to be influencing the market more than demand. Create your live VT Markets account and start trading now.

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