China's record imports of crude oil last month have largely, and correctly, been dismissed by the market as being artificially boosted by restocking before the Lunar New Year holiday.

However, there is always the danger that in attributing all the exceptional strength in imports to one factor, other influences may be discounted as well.

There is little doubt that the surge in imports to 6.63 million barrels per day was largely due to refiners buying before the week-long holiday that started at the end of month and went into early this month.

The imports were 5 per cent higher than the previous record, achieved in December.

More importantly, they were 17 per cent higher than the 5.66 million bpd crude imports averaged last year.

It is not possible that crude oil demand has expanded by almost 1 million bpd in China, so the logical thing to expect is that this month's imports will be lower.

But what if this month's imports remain robust and do not fully "pay back" the strength in last month's arrivals?

Thomson Reuters Oil Analytics, which assesses crude flows based on vessel movements, expects Chinese oil imports of about 26 million tonnes this month, which is equivalent to about 6.8 million bpd.

If this forecast proves to be accurate, it would result in another record month.

Even if the forecast is optimistic and some of this month's cargoes were counted in last month's arrivals by customs, the risk is still that oil imports for the first two months of the year may be at record levels.

However, this would not automatically signal that demand growth is accelerating in China.

Part of the strength in imports could be put down to an increase in both commercial and strategic stockpiling.

Refinery throughput averaged 9.61 million bpd last year and was 9.93 million bpd in December.

Since then, two new refineries, with a combined capacity of 440,000 bpd, have started.

If this additional capacity is added to last year's average, it takes the likely processing rate for the first few months of this year to about 10.05 million bpd.

Imports in the past two months averaged 6.47 million bpd, and domestic output is averaging 4.2 million bpd, meaning that about 10.67 million bpd of crude was available for processing over the period.

While last month's throughput is likely to have been higher than December's 9.93 million bpd, it's unlikely to have been as high as the amount of crude that was available.

This means that some crude has been finding its way into storage tanks.

Given that most refineries operate with about 21 days of crude as a working inventory, this means that the two new plants would have imported about 9 million barrels to ensure sufficient working stocks.

It is likely that they did this over a period of several months, but even assuming six months, it still means a boost of 50,000 bpd to imports.

But it is more likely that the inventories were bought over a shorter timeframe, and if three months is assumed, then the import boost is about 100,000 bpd.

But there is also the possibility that strategic stockpiles are being filled, with a report from Barclays on Friday pointing out that the 20.1 million barrel Tianjin facility may have been receiving cargoes.

Another strategic storage, the 18.9 million barrel Huangdao cavern, is likely to be ready for filling this quarter, Barclays said.

If these strategic storages are filled over a six-month period, it would boost imports by 216,000 bpd, thereby helping to explain the recent strength in crude imports.

China does not divulge details of strategic storages and also does not release volumes in commercial stockpiles, making it difficult to calculate precisely the true state of demand.

This makes it key to look at the refinery throughput numbers and net fuel imports.

Rising refining processing will indicate increasing consumption, and the level of net imports will reveal how much of the increased throughput is being exported as refined fuels.

But for now, the risk is that dismissing last month's crude import record as solely, or even mainly, as a result of the Lunar New Year holiday ignores the fact that stockpiling and demand are growing at a faster rate than the market currently believes.

(scmp.com Feb 18, 2014)