Continued reductions in crude stocking by China could leave as many as 13 VLCCs unemployed in 2018.
For more than a decade China has been pivotal in shaping oil trade flows. In 2014, China’s crude imports accounted for nearly 15% of global crude imports, but by the early part of 2017 its share had grown to 17%. Since 2014, China has imported more oil than it has consumed in order to build up its oil stocks. Stocking has been driven low crude prices and in the first half of 2017 as much as 12% of total Chinese imports could have ended up in storage tanks.
However, China’s stocking activity has declined sharply in the third quarter of 2017 falling from 1.2 to to 0.5 mbpd between the second and third quarters. We expect this downward trend to continue as stocking becomes less attractive because of higher oil prices and storage capacity being close to full capacity. We expect implied storage for 2017 to be 0.75 mbpd, assuming a fourth quarter storage build similar to that of third quarter, that is 0.5 mbpd. If the newly elected Xi government decides to reduce the stock build to pre-2014 levels (0.26 mbpd), we expect the decline in stocking activity to counterbalance the impact of higher refinery demand and lower domestic production in 2018. We say this because China’s imports should ideally increase by 0.5 mbpd in 2018, driven by the 0.35 mbpd increase in refinery throughput and 0.15 mbpd decline in domestic production. However, because of lower stocking activity, we expect China’s crude oil imports to be flat next year.
The likely decline in China’s stocking activity will in all probability hit tonnage demand in the VLCCs and Suezmaxes sectors. Considering an average haul length of 6,860 miles for China’s crude imports, a 0.5 mbpd decline in the country’s stocking activity could result in as many as 13 unemployed VLCCs in 2018.
In a worst case scenario, if stocking was to be halted completely as many as 19 VLCCs could find themselves idle in 2018.