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Monday, December 11, 2017

Chinese oil imports continue to expand

According to the International Energy Agency (IEA), the short-term outlook for Chinese oil demand appears to be highly dependent on policy measures, including both macro-economic management issues and oil pricing policy. Despite a recent string of increases, so-called ‘administered’ oil prices remain well below international markets. While such price controls are shielding end-users from the full effect of international market increases, they may also constrain supply by undermining refining and import economics. 

There have been reports that Chinese refiners had been resisting government calls to boost runs as rising crude oil import costs cut into refining margins. There have also been reports that tightness - even sporadic shortages - had reappeared on domestic product markets. Import economics are contributing to the tightness as domestic products retail below import costs. 

In addition to supply constraints, Chinese demand is being undermined by energy-saving measures and power generation capacity expansions. Non-oil fired electricity generation capacity is now reportedly running ahead of demand, narrowing the supply-demand gap and thereby easing the need for diesel-fired back-up generators. Domestic heating was delayed in the North, which also helped mute demand growth. 

The Financial Times (FT) says that China accounts for about one third of global oil demand growth and its imports of crude have been closely correlated with oil futures prices. The FT also thinks that the 24% year-on-year drop in January's oil imports probably does not indicate any collapse in demand that can undermine the crude rally.

Chinese demand growth is expected to slow this year, but in January state-run refineries processed 5.7m barrels per day, the second-highest monthly rate ever. This suggests de-stocking by refiners, not a fall in underlying demand, an explanation backed up by the surge in crude imports at the end of 2004. At current consumption levels, China has barely 10 years of oil reserves, but it imports about half its consumption and BP estimated that China’s reserves to production ratio for 2003 was 19.1. Later this year, as storage projects are completed, China is expected to build up strategic stocks. An estimated 4m barrels of oil is also needed to fill five new pipelines to be completed in 2005.

The usual caveat about extrapolating from one month of data obviously applies to erratic Chinese statistics. Next month's figures might also look weak due to February 2004 crude imports having surged by 63%. But the broader trend of China's growing appetite for oil appears intact. 

Contact: Erik Ranheim