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Singapore: A rise in China's refining capacity in the second half of 2006 should give a boost to the Asian crude market which is facing a bearish year as Japan and South Korea demand holds steady and global output rises. Crude oil traders are hoping that a rebound in Chinese imports together with moderate Indian growth will absorb extra output from the Middle East, West Africa and Russia, supporting fundamentals in a region short on crude but long on products. "A contangoed market tells you that the market is weak. I foresee a bearish scenario but it's hard to call when it will materialise," a veteran trader with an oil major said.
China's primary refining capacity will increase by 650,000 barrels per day (bpd) this year, a Reuters survey shows. Much is slated for operation in the second half of the year, and is not expected to absorb crude imports into China until then. Even so, traders and analysts worry that China will post another unimpressive oil demand growth this year as it continues to juggle between low domestic products prices and over $50 a barrel crude imports. "The unstable situation in the Chinese market seems to be unresolved. It could go two ways: either it could go badly, with a very slow growth that could be repeated, or the government could do something," said John Vautrain, vice-president in Singapore of Houston-based Purvin and Gertz. An anticipated increase in state-set domestic Chinese fuel prices, kept well below international crude costs in 2005, could spur additional import demand by restoring profitability to refiners who lost billions of yuan last year. Middle East crude has been struggling so far this year, with most first-quarter volumes already committed but at much weaker differentials than a year ago as output rises. Daily Opec capacity will rise by 1 million barrels this year, the Paris-based International Energy Agency (IEA) estimates, of which some 700,000 barrels will be from the Middle East. Supplies will also be lighter than in the last few years, making them more attractive for refiners seeking high-profit fuels. "It will be easier to place Middle East barrels this year in Asia," said David Fyfe, principal IEA oil analyst.
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