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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.
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The IEA expects Chinese refineries to demand around 300,000 barrels a day less crude oil in March compared to 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.
Globally refineries will reduce demand by around 1.7m b/d in March compared to February, as Europe also enters maintenance system, according to the IEA, not far off the fall of about 2m b/d in demand that was seen in January compared to December.
“Reduced demand from refineries may explain why prices have fallen and Saudi Arabia is restraining production,” said Mr Halff.
Futures in Brent crude, the global oil benchmark, fell to a year-low of $109.14 a barrel last Friday, having topped $119 in early February after a strong rally at the start of the year. At 9am in London, Brent futures were up slightly to $109.64.
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 ten 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 by 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.
