Yesterday, Sinopec announced that it is restarting some of the Shengli crude oil production that was shut in 2015-2016 in the flat price drop.
Interestingly, this announcement comes in the same week as the start of China’s oil futures.
Shengli is a deliverable crude oil to China oil futures and the new futures offer therefore a mechanism for Sinopec to lock-in a high value for its Shengli crude (about 65 $/bbl for September).
Up to now, China’s oil futures have been mostly seen through the angle of import economics but China’s oil futures should also allow maximization of local crude oil production on price spikes through hedging or price lock-in through delivery (for Shengli crude oil).
The IEA has 4Q2018 China crude oil production -100 kb/d lower than a year ago. On the combination of current oil prices and the new price lock-in possibility of China’s oil futures, we think it is reasonable to use a scenario of higher production for China, of at least unchanged on a y/y basis for end-year.