One Factor That Will Support Oil Prices In The Long Term

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Summary

China’s crude oil imports for November increased by 18% (year on year) to around 7.87 million barrels per day.

Teapot refineries may add around 200,000-400,000 barrels per day to China’s overall crude oil import growth in the year 2017.

China’s oil output in October 2016 was its lowest level since May 2009.

On Wednesday, the U.S-based Energy Information Administration released its weekly oil report. As per the report, the U.S commercial crude oil inventories decreased by 2.4 million barrels (against the market expectation of 1 million barrels). However, inventories at Cushing increased by 3.8 million barrels. The American Petroleum Institute (API) had earlier reported a crude oil inventory drawdown of 2.21 million barrels and a Cushing inventory build-up of more than 4 million barrels. At the time of writing this article, the WTI (WTI) and Brent were trading at $50.8 and $53.78 respectively. Although U.S crude oil inventories fell by 2.4 million barrels per day, the WTI was steady at $50 barrel level because of growing doubts over OPEC's upcoming production cuts. However, there was one development which can be bullish for oil prices in the long term.

China's oil imports are set to increase in near future

Being the second largest importer of crude oil after the United States, China's crude oil imports do have a major impact on the global supply-demand fundamentals. And, with low oil prices and declining domestic oil production, China is dependent on its oil imports more than ever before. According a latest report, China's crude oil imports for November increased by 18% (year on year) to around 7.87 million barrels per day. In fact, China's crude oil imports, for the first 11 months of 2016, increased by 14% when compared to the first 11 months of last year. When looking at China's crude oil import growth closely, we see that this growth is the result of the rise of its small independent refiners or so called 'teapot' refineries. In fact, these teapot refineries contributed almost 90% to China's crude oil import growth in 2016.

The Rise of China's Teapot Refineries

It is estimated that China's teapot refineries import more than 1.2 million barrels of crude oil per day. According the research consultancy - Energy Aspects, teapot refineries will add around 200,000-400,000 barrels per day to China's overall crude oil import growth in the year 2017. "For the teapots, crude imports (and ensuing product sales and exports) are also an opportunity to expand their share of the domestic retail market and to develop a regional footprint in Asia and potentially beyond," said an analyst from Energy Aspects. This means that these teapot refineries will play a crucial role in determining China's future crude oil import growth.

Takeaway for Investors

As we see that China's teapot refineries are all set to increase their crude oil imports in 2017, this factor will definitely help in easing the global supply glut in the near future. In my earlier articles, I had mentioned how China (along with India) will drive the global demand for oil. At 3.78 million barrels per day, China's oil output in October 2016 was its lowest level since May 2009. Besides this, China's aging oil fields have also contributed to the slump in its domestic oil production. With falling domestic oil supply and a robust demand, it is pretty clear that China's oil imports are all set to increase in the near future. Moreover, if OPEC and Russia stick to their promise and reduce their crude oil production by around 1.4-1.6 million barrels per day (from January next year), then this factor (along with surging oil demand from China) will certainly speed up the supply-demand rebalancing of crude oil and will support oil prices (NYSEARCA:USO) in the long term. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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