China Oil &Gas-Highlighting near-term China risks to oil price:SPR close to max,teapot pullback,gasoline slowdown

China has taken the opportunity of lower oil prices since early-2015 toaccelerate the strategic petroleum reserve (SPR) builds at c.1mbd, pushingthe total oil in stock under SPR to an estimated 400mmbbl, or 53 days ofnet crude oil import equivalent, based on JPM calculation of multiple datapoints announced publicly. This volume might be close to the capacitylimit, in our view, and together with potential teapot utilization pullbackand slower-than-expected demand from China could increase near-termrisks to global oil prices (c.1.2mbd impact). We stay cautious onupstream plays and continue with our relative bias on the downstream.

    JPM SPR methodology. China regularly publishes four data points forcrude oil: domestic production, net imports, commercial inventories andrefinery throughput. Given the exclusive consumption of crude oil atrefineries in China, we derive the SPR monthly changes to account forthe balance implied by the four data sets. Furthermore, based on Chinagovernment’s official release of SPR level in 2014/15, we arrive at thecurrent SPR volume, which compared with China’s previouslyannounced SPR plans seems to be close to the max (see details inside).

    Implication to China’s oil imports. Partially confirmed with ourdiscussion with oil traders, our base case assumes China continuing highvolumes of (1mbd) SPR builds through August, while factoring in 7%domestic crude production decline and 2% refinery throughput increase.

    This means 15% mom decline in China’s crude imports in September, or1.2mbd loss from the China inventory demand. China’s net oil importsytd has expanded 16% yoy, versus a flat consumption growth.

    Key risks to our analysis: 1) Incomplete public data like thecommercial stocks reported by China Xinhua OGP, which adopts limitedsampling method and there are chances of misrepresenting the wholeindustry; 2) According to the SPR rules recently revised by the NEA,SPR now includes some commercial contributions and this change maycomplicate our assessment of the actual SPR capacity.

    Other China negatives to oil price: 1) slower-than-expected gasolinedemand China (flat consumption in May, 3% yoy growth YTD, versusJPMe 6-7% for FY16) add to previous concerns around diesel; 2) lowermargin, high inventories, port congestions and extended maintenancemay slow teapot’s crude purchase in the near term; 3) if gasoline fails todeliver growth in the summer, traders may seek to release some floatingstorages in Asia, a volume estimated at >20mmbbl.