Market analyst Clyde Russell on the business relationship between Iran and China
The gain in China's crude oil imports in May to a record high is a reflection of increased stockpiling rather than a sign of rising demand and economic strength.
Imports surged 14.5 percent from April to 25.48 million tonnes, equivalent to about 6 million barrels a day, the first time daily imports have started with the number six.
At the same time domestic oil output was steady around 4.12 million barrels a day, making total oil available in May at just over 10 million barrels a day.
However, refineries only processed 9.03 million barrels a day, a modest 0.4 percent gain from April's figure, meaning about 1 million barrels a day appears to have headed into storage.
At first glance this appears counter-intuitive, as cargoes for May delivery would have been booked in late March and April, a time when Brent crude prices were at their highest.
Brent reached its intraday high for the year above $128 a barrel in early March and traded above $120 the whole month and for most of April, ending that month at $119.47.
Chinese crude buying patterns in recent years have tended to show that purchases ramp up when prices are relatively cheaper, and slow closer to the base level of demand when prices rise.
Looking at last year, when Brent traded above $126 a barrel in early April, Chinese crude imports dropped below 20 million tons in June and July, which were the weakest two months of 2011.
However, when Brent started to drop rapidly from August as concern over the European sovereign debt crisis mounted, Chinese imports started to increase, rising to what was at that time the second strongest level on record in November, and then posting fresh records in the first quarter of 2012.
It would have been reasonable to expect that given Brent was trading at its highest for this year in March and April, again on European debt woes, that Chinese imports would have eased.
But the slowing in April may have been a false dawn, given May's strong recovery.
So the question remains: why are the Chinese continuing to buy crude for storage even though the price increased sharply, conditions that have in the past resulted in less oil flowing into strategic reserves.
The answer may be in what is different this time around - namely the concern about Iran.
In 2011 China was buying more than 500,000 barrels a day from Iran, a tenth of its own imports and more than a fifth of the Islamic republic's exports.
While this has slipped to an average of 385,000 barrels a day for the first four months of 2012, China is still a major buyer of Iranian crude.
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China has also yet to receive a waiver from the United States exempting it from the financial sanctions, starting at the end of this month, that target Iran's oil trade as part of Western efforts to force Tehran to open its nuclear program to international scrutiny.
While a compromise with Washington may well be in offing, it seems the Chinese have decided that it's best to be prudent and cautious and make sure they have enough oil in reserves just in case they have to cut off imports from Iran altogether.
While the market is comfortable now that any lost Iranian output can be sourced from other suppliers, mainly Saudi Arabia, there wasn't this level of confidence in late March and April, when China would have been securing May cargoes.
If the Chinese were worried about Iran and boosting storage for that reason, despite the high Brent price, then it's also reasonable to assume this process likely continued for June's imports, which would have been booked late April and early May.
The 23 percent drop in the Brent price since mid-March to current levels around $97.50 a barrel may also encourage the Chinese to continue filling strategic storage, as well as commercial inventories for new refining capacity scheduled to come on line in the second half.
There is also the possibility that actual demand increases in the second half as the authorities stimulate economic growth.
Taken together, it seems that China's crude imports will remain robust, with any expected weakness not happening because of the Iran issue.
Like many analysts, I had expected the jump in Brent prices in the first quarter and a softer economy to temper gains in crude imports, but it appears the Iran issue and the resulting need to boost storage has come up trumps.
On Jan. 12, I wrote that the bullish case for China's oil demand depended on ongoing stockpiling, and this still holds true.
In the January-to-May period, crude imports have averaged 5.68 million barrels a day, an 11.1 percent gain over the 5.11 million from the same period in 2011.
Taking average imports for the first five months of 2012 together with average domestic output of 4.1 million barrels a day, and subtracting off the 9.26 million barrels a day of refinery throughput, and this leaves an average 520,000 barrels a day that is likely to have been stockpiled.
This is roughly half the daily rate of what appears to have been put in storage in May, which probably makes last month a bit of an outlier.
But even an average above 500,000 barrels a day is an enormous number, and if maintained would result in 183 million barrels of storage being filled over 2012.
This would seem unlikely, but if stockpiling does ease, an acceleration in second half demand could result in oil imports maintaining an increase of about 10 percent over 2011.