China’s Oil Imports Up 2% As Asian Majors Offer Robust 2020 Response To Coronavirus Turmoil

It is said that Asia’s voracious appetite for crude oil in general, and China’s in particular, fuels bulk of the global demand that’s been so badly stunted by the spread of the global coronavirus or Covid-19 pandemic. However, there are signs of cautious optimism that demand is slowly returning as lockdowns gradually ease across the continent home to many emerging economies.

Latest data suggests China’s crude oil imports registered a bounce back in April from a month earlier on a daily average basis, as the country’s refiners increased output on the back of a cautious return in fuel demand as Beijing eased domestic lockdowns across provinces including in Hubei, whose capital Wuhan was the epicenter of the initial outbreak in February.

China’s General Administration of Customs reported this week that crude oil imports came in at 40.43 million tons in April. That is equivalent to 9.84 million barrels per day (bpd), a figure that is around 1.7% higher than 9.68 million bpd imported in March.

While it is positive for the oil market, a bit of perspective is required. Demand might be up on a month-on-month basis from a dire March to a much better April. But on an annualized basis imports are actually down by 8.13% on the 10.64 million bpd recorded in April 2019, according to Reuters.

Imports during the first four months of the year reached 167.61 million tons, or 10.11 million bpd, 1.7% higher on an annualized basis. The period includes a healthy January, and half of February, when the Covid-19 outbreak had not been declared a global pandemic, a dire March peppered with global lockdowns including China’s own, and a somewhat better April when Beijing relaxed domestic restrictions.

Before the coronavirus pandemic hit China, the country typically imported an average of 14 million bpd. Those levels are a long way off but empirical and anecdotal data does indicate refinery utilization rates are improving to around 70-75% from late February lows of 40%. Major Chinese refineries that were offline for maintenance in March, including Shijiazhuang and Shanghai plants, have also now restarted operations.

But this will not immediately translate into substantial summer crude demand upticks as refineries have to crack copious amounts of inventories leftover from lackluster months of February and March. Rock bottom oil prices in April also triggered a further inventory build-up.

Nonetheless, the latest data must be greeted with cautious optimism. The big question is can Asian oil and gas majors, many of which are national oil companies (NOCs) weather the coronavirus downturn?

The answer – so far – for the biggest of the lot, including China’s own energy behemoths, appears to be a firm ‘yes’ given their liquidity, access to capital and an enviable level of sovereign support which could strengthen if market fundamentals deteriorate further in 2020.

On the evidence of what we have seen so far into the current oil trading year, select Asian NOCs have already raised significantly large sums. For instance, Malaysia’s Petronas raised $6 billion from the international bond market earlier in April despite the ongoing downward spiral in oil prices at the time. What’s more the offering was six times oversubscribed.

Indonesia’s Pertamina also raised $3 billion successfully. Many Asian NOCs – especially those of China like CNPC – have robust balance sheets and access to affordable capital through state-owned banks, helping to maintain investment where others cannot, according to rating agency Moody’s
MCO
. 

Of course, the agency admits “drastically lower oil prices will hurt Asian NOCs” with Brent and WTI oil futures trading over 60% lower since the starts of the year, but adds that sovereign support will continue to underpin their credit quality.

“Rating changes for Asian NOCs are likely to be small despite low oil prices straining their credit metrics. We expect that additional notches of uplift owing to sovereign support could be incorporated in the ratings of most NOCs should their Baseline Credit Assessment (BCA) decline,” says Vikas Halan, Senior Vice President at Moody’s.

With large cash reserves in the coffers, the likes of CNPC and Petronas, can protect their credit profiles from low oil prices for at least the next 12-18 months. India’s largely retail and downstream heavy NOCs would continue to benefit from government support either side of the country’s coronavirus lockdown.

Additionally, many upstream divisions of Asian NOCs, including some rather fortuitous ones, have hedged their oil price risk for a portion of their production. They will be better positioned to withstand the sharp decline in crude prices in the near term.

For instance, Moody’s reckons Thailand’s PTT will benefit from hedges at a price floor of $55 per barrel for approximately 40% of the crude sales volume at its upstream subsidiary. Meanwhile, the pricing of the domestic gas contracts at Pertamina are not linked to spot oil prices, and will partially mitigate its exposure to oil price volatility.

However, the year is likely to be one of cash preservation in the current low oil price environment, even if some Asian NOCs, quite like their Middle Eastern counterparts, are cautiously sniffing around for asset acquisitions at lower prices in Western markets where there appears to be a complete clampdown on capital spending.

Based on the latest financials of the 20 biggest International Oil Companies by market capitalization, there has an average 30% reduction on the previous year’s budget and spending curtailments in excess of $60 billion.

Yet, many Asian NOCs – including Petronas (Malaysia), CNOOC (China), Pertamina (Indonesia) and ONGC (India) have said they are going to broadly maintain their 2020 capital spending budgets for domestic investment at pre-coronavirus downturn levels. Market sentiment remains negative over the near-term but it seems many Asian oil majors seem better prepared to cope with it.