From our combined onshore inventories and seaborne imports data, we can create what we call implied refinery runs, which gives us a good idea of what’s happening in China before it happens. We’ve noticed very poor crude demand for refinery processing, which has resulted in run cuts and lower margins. They don’t have much of an export market, so their stocks are building. Additionally, at sea, you see very high oil product levels. Russia is having trouble finding homes for its barrels after newer, stricter sanctions on financial institutions, ports, and specific vessels. So, there’s a big buildup of oil products at sea, and it’s taking additional time to move around the Cape of Good Hope for Middle Eastern clean products as well.
How full is onshore oil storage in China?
Those crude inventories are reaching similar levels to last year, which is above the seasonal range and above the three-year average. Stocks are building, at a time when refineries are supposed to be coming off maintenance and returning online. You would expect inventories to be drawing down, not building. In Shangdong, onshore crude inventories are well above the seasonal range for this last year and those refineries are performing even more poorly than the main ones.
Are lower oil prices reflecting themselves at all in tanker rates?
The freight market has had a very strong year so far, with the added ton miles. By contrast, the dirty market is experiencing a slight downturn. We’ve seen Aframaxes lose out to Suezmaxes for several reasons, showing some dynamic shifts. An increase in possible crude exports out of the Middle East could buoy VLCC rates. If we see the TMX expansion out of Vancouver heating up, most of those Aframaxes headed to Vancouver will likely end up going into the PAD 5 refining system. However, it does mean more crude on the water, so that’s something to look out for. Additionally, we’re seeing some LR2s switching from carrying dirty to clean cargo, which incurs costs. This is a significant signal for the freight markets.