Last updated: March 13, 2013 5:45 pm

Oil demand hit by China refinery outages

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Maintenance at newly built Chinese refineries is weighing on global oil demand, according to the International Energy Agency.

In recent years China and other Asian governments have invested heavily in domestic refining capacity to process crude oil into usable products such as petrol and diesel.

The IEA expects Chinese refineries to demand several hundred thousand barrels a day less crude oil in March compared with February, and a similar month-on-month fall in demand at refineries elsewhere in the Asia-Pacific region.

“There has been a much steeper-than-expected drop in demand for crude from refineries in the first quarter, which reflects the huge growth in global refining capacity,” said Antoine Halff, head of the oil markets division at the Paris-based IEA.

Global demand for crude oil has traditionally fallen in January when US refineries are temporarily shut down for maintenance. But increased Asian refining capacity means the March turnround season is becoming increasingly important.

According to the IEA, globally refineries will reduce demand by around 1.7m b/d in March compared with February – not far off the fall of about 2m b/d in demand that was seen in January compared to December – as Europe also enters a maintenance period.

“Reduced demand from refineries may explain why prices have fallen and Saudi Arabia is restraining production,” said Mr Halff.

Futures in Brent crude fell to a year low of $108.33 in afternoon trading in London, although the sell-off did not appear to be linked to the IEA report.

Brent fell more than a dollar shortly after the Energy Information Administration of the US Department of Energy said crude stocks at Cushing, Oklahoma, had fallen by their most in two years in the week to March 8.

Surging production of US shale oil has weighed on the price of West Texas Intermediate, the benchmark US crude oil, which as a result has been trading at a steep discount to the global benchmark, Brent. But after the EIA data showed stocks of crude at Cushing had fallen to their lowest level so far this year, that discount fell below $16 for the first time since late January.

“The steep fall in Brent is typical of a market dominated by positioning rather than fundamentals,” said Amrita Sen, an analyst at Energy Aspects. “People are unwinding their long Brent-WTI positions.”

The closely watched monthly oil market report of the Paris-based IEA, which co-ordinates energy policy among the industrialised countries, also highlighted the challenge facing Saudi Arabia and Opec, the oil producers’ cartel, as they contend with rising shale oil output from North America.

The IEA is forecasting demand for oil from Opec producers to fall to its lowest level since at least 2010 in the second quarter of the year, as non-Opec production, particularly from North America, rises.

Saudi Arabia cut production sharply late last year in what many analysts saw as an attempt to accommodate rising North American production without weighing on prices. Riyadh held production steady at 9.25m b/d in February, according to the IEA, well below its estimate of the Kingdom’s sustainable production of 11.9m b/d.

But overall Opec production rose 150,000 b/d as Iraqi production rose more than 5 per cent month on month to 3.14m b/d. The capacity of Iraq’s recovering oil industry is expected to rise quickly posing a further challenge to Opec production discipline.

Iranian crude oil production climbed to its highest level since August, averaging 2.72m b/d in March. Exports of 1.28m b/d were up more than 10 per cent from an upwardly revised 1.13m b/d in January, with China and India thought to be responsible for most of the increased buying.

The IEA is also raising its forecast for Iranian exports in March, based on data on tanker bookings.

The Paris-based organisation also reiterated its relatively cautious view for Chinese oil demand to increase only 3.9 per cent year on year in 2013. The IEA has been arguing that recent signs of improved demand for crude from China reflect a build-up of product inventories, rather than consumption of crude oil products by Chinese consumers and industry.

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