The obvious answer is the possibility of military confrontation between the United States and Iran, but if the question is swapped to which factor is more likely to influence crude markets, then China comes to the fore.
While the actions of both U.S. President Donald Trump and Iran’s hardline leaders are challenging to predict, the chances are that both sides manage to hold off from an outright war, while still trying to undermine each other’s position in the volatile Middle East region.
This is the pattern seen again with the U.S. killing of Iranian general Qassem Soleimani and the subsequent missile attacks by Tehran against U.S. military bases, which killed nobody and seemed calculated not to draw a further round of retaliation.
The tensions in the Middle East are likely to remain front and centre in media headlines, meaning that the issue will occupy crude producers, traders and buyers, even if the actual impact on oil prices is muted.
But assuming some kind of lid can be kept on war in the Middle East, a more pertinent issue for the crude oil market may be what’s happening in China, the world’s largest importer.
Last year saw a sharp increase in both China’s imports of crude and its exports of refined fuels.
While official December figures have still to be released, it looks like China’s crude oil imports will have risen by around 10% in 2019 from the year earlier.
In the first 11 months of the year they were up 10.5% to the equivalent of 10.1 million barrels per day (bpd).
Refinitiv data points to Chinese imports of about 10.7 million bpd in December, which if achieved would mean full year imports of around 10.1 million bpd, an increase of about 906,000 bpd over 2018.
This means that China is by far and away the most important driver of global oil demand growth, given the expectation by the International Energy Agency that world demand growth was about 1.2 million bpd in 2019.
China’s appetite for crude was fuelled by the commissioning of two new large refiners, with a combined capacity of about 800,000 bpd, as well as ongoing efforts to build both commercial and strategic stockpiles.
The increased refining capacity is a structural factor that will serve to keep China’s imports of crude robust, but there are some question marks over the continuing build-up of stockpiles.
China doesn’t disclose the amount it holds in its strategic petroleum reserve (SPR) and estimates among analysts vary widely.
However, one thing does appear likely and that is China is getting ever closer to reaching 90 days worth of imports in its SPR, especially since a government official said in the wake of the September attacks on Saudi Arabia’s oil facilities that reserves were at 80 days.
China appears to have been building commercial and strategic inventories at a rate of about 960,000 bpd in the first 11 months of 2019, a figure derived from taking the total amount of crude available from both domestic output and imports and then subtracting the volume of crude processed by refineries.
While it’s possible that China will continue to add to its SPR in 2020, it’s unlikely that it will do so at the same pace as it did in 2019.
The other side of the China crude equation is the rising exports of refined fuels, which gained 14.2% to about 1.4 million bpd in the first 11 months of the year from the same period in 2018.
The Chinese government issued its first tranche of product export quotas for 2020 on Dec. 31, with a strong 53% increase from the first batch in 2019.
Beijing normally issues at least three rounds of fuel export quotas a year, with the aim of allowing major refining companies to export surplus fuel while ensuring the domestic market remains well supplied.
If the pattern of the first tranche is repeated later in 2020, it would appear almost certain that China will increase its exports of refined fuels.
While this may impact refinery margins in Asian countries, it may also serve to displace crude demand.
If global demand growth for crude remains weak outside China, then a barrel of crude imported by China and then exported as refined products may serve to displace a barrel of crude elsewhere.
In other words, rising Chinese fuel exports may result in lower refinery processing in other countries that will have to compete against Chinese products, such as Japan, South Korea and Singapore.
Source: Reuters (Editing by Richard Pullin)