Oil Industry Tense Over Chinese Oversupply... Petroleum Supply Expected to Exceed Demand This Year

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] An analysis has emerged that global oil supply will exceed demand this year. In particular, the oversupply originating from China is expected to negatively impact the profitability of the domestic refining industry.

According to the Korea Petroleum Association on the 22nd, the global oil supply increase in 2020 is projected to be 1.7 million barrels. This is largely due to China's refining capacity having increased by about 900,000 barrels last year, along with an additional 1.18 million barrels of refining facilities currently under construction. Furthermore, large-scale new projects are being launched in non-OPEC countries such as Brazil and Norway, and there is a high possibility that Iranian oil will re-enter the market, which is also considered to have an impact.

A representative from the Korea Petroleum Association explained, "China's refining capacity growth rate is usually around 1.5% annually, but it surged to 5% last year," adding, "China is the biggest competitor for the domestic refining industry, and as China's supply increases, it is expected to affect exports and overall business conditions."

In fact, independent refiners in Shandong Province had a refining capacity of about 3.5 million barrels in 2019. This accounts for approximately 3.5% of the world's refining capacity and about 25% of China's total refining capacity. Since new large-scale refining facilities have been established along the coast of the adjacent provinces in this region, private petrochemical companies are currently cornering these refiners.

As a result, China has risen from being a net importer of petroleum products to becoming one of the world's top 10 petroleum product exporters in 2018. Between 2012 and 2018, total exports of gasoline, diesel, and jet fuel increased by 277% to 925,000 barrels, and exports in 2019 are estimated to reach about 1.09 million barrels. China added about 900,000 barrels of refining capacity last year alone, and the refining facilities under construction currently amount to 1.18 million barrels.

Considering China's oversupply, along with economic slowdown, strengthened environmental regulations, and decreased vehicle sales leading to weakened domestic fuel demand in China, the only outlet for surplus petroleum products is ultimately exports.

The problem lies in demand. Global oil demand is expected to increase by only 1.2 to 1.3 million barrels compared to 2019. Although gasoline demand in China and India is rising, demand in OECD countries is declining, and growth in demand in South America and the Middle East is expected to slow down.

An industry insider said, "If oversupply continues due to expanded refining capacity in China, the selling price of petroleum products will decrease, which is disadvantageous for the domestic refining industry," adding, "Since it is difficult to reduce facility operating rates, profit margins will decline."

This content was produced with the assistance of AI translation services.