In China, the world's largest importer of crude oil, trade allowances may allow the refining industry to ship more crude and export more fuel in the months ahead.
The local refiners and traders have been given two separate batches of crude-import quotas for the remainder of the year and early 2023, as well as a 15 million ton fuel-export quota, according to industry consultant JLC. The move is likely to increase China's oil demand as processors grab cargoes to use up their allowances, according to traders who are participating in the market.
The anticipated increase in China's oil consumption as refiners lift operating rates may help to support global prices that recently collapsed to the lowest level since January as traders shunned commodities. China's crude demand has slowed this year as growth slows due to rolling Covid 19 lockdowns.
The OPEC producers coalition is set to weigh a reduction in production due to the slump in prices, with Ministers set to meet in Vienna later Wednesday. A reduction in supplies could tighten the market just as traders start to believe in a return of China's appetite for oil.
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Buyers may take more short-haul cargoes that can arrive by the end of December, or purchase crude from Russia or Iran, flows avoided by many western users and some Asian peers, to use up their quotas, traders said. The spot market in Asia will start trading December-loading Middle Eastern cargoes later this month that take three to four weeks to reach China.
Prompt Dubai swaps - one indicator of tightness in supply widened to $2.90 a barrel in backwardation on Wednesday. That was higher than $2.35 a barrel in backwardation a week ago.
In terms of fuel exports, the allocated volume equates to more than 100 million barrels, meaning that refiners need to ramp up operating rates to take advantage of the quotas. In October and November, runs are expected to increase by more than 1 million barrels a day, according to industry consultant FGE.
In an October 4 note, FGE said that refiners will need to look for short-haul cargoes while drawing on commercial inventories to do that. We have not heard of any SPR release from the Chinese government so far, but we continue to see this as a possibility, it said, referring to stockpiles controlled by the state.
The global oil benchmark Brent traded at $91.77 a barrel ahead of the OPEC meeting on Wednesday. It is 18% higher year-to-date, but it is down from above $100 a barrel three months ago.
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