Bullish China Oil Demand Depends on Storage
OREANDA-NEWS. February 07, 2012. There appears to be an emerging consensus that China's oil demand will accelerate in 2012 compared to last year, with consumption slated to jump by more than half a million barrels a day. Such an increase would take China's crude demand to around 9.5 million barrels a day.
There is also an assumption that China's domestic oil output won't gain significantly in 2012 from the current levels around 4 million barrels a day, with the risks actually weighted the other way toward declining output. Assuming steady domestic crude production, this means China will have to import an average 5.5 million barrels a day, a gain of 10 percent over the 5.08 million barrels a day in 2011. This would be roughly double the 5.6 percent growth in imports last year, but down on the 17.5 percent rate achieved in 2010.
Nonetheless, while analysts and economists tend to focus on changes in growth rates, the physical market tends to think in terms of actual volumes, and finding an extra 500,000 barrels a day for China may prove somewhat challenging.
But before going into whether the market can supply additional volumes amid potential disruptions to supplies from Iran and Nigeria, it is reasonable to ask whether China will actually need half a million more barrels every day this year.
The reason to question this assumption is that Chinese economic growth is moderating as exports come under pressure from weakness in Europe and the effects of monetary tightening slow parts of the domestic economy.
While the expectation is that China will move to stimulate the economy, it will take several months for this happen, meaning the first half of 2012 is likely to be a continuation of the slowing growth seen in the second half of 2011. In this case, it's hard to see why crude demand in China should grow faster than it did in 2011, especially in the first half of this year.
Of course, a strong rebound in Chinese economic growth in the second half will boost crude demand and imports could well rise, but the question will be whether they gain enough to compensate for any weakness in the first half. However, the wild card when talking about China's crude demand is stockpiling, both strategic and commercial. There is widespread expectation among analysts that China will continue to fill storage tanks, adding to crude demand.
Industry sources say stockpiling has added around 190,000 barrels a day to China's oil demand in recent months, a figure supported by November's crude imports being the second-highest on record. But oil prices also play a part in how much China decides to stockpile.
It's probably not a coincidence that China's oil imports surged in November and stayed strong in December, as crude prices had fallen to the lowest in eight months in October, when cargoes would have been booked for delivery in the last two months of 2011.
Brent crude dropped below USD 100 a barrel in early October, but has since recovered to just under USD 113 a barrel. Higher crude prices may well serve as a deterrent to stockpiling in China, and analysis of past movements in crude imports show the Chinese tend to ramp up purchases when costs decline.
There is a further wild card for the China oil picture in Iran, where the market expectations are that the Chinese will prove willing buyers (at a substantial discount) of crude from the Islamic Republic. Assuming U.S. and European sanctions on financial dealings with the Iranian central bank do crimp Tehran's ability to get paid for its crude, the assumption is the Chinese will step in, buy the oil and enjoy better prices from the increasingly desperate Iranians.
This may be too simplistic a scenario. While it's entirely possible that China will buy additional Iranian crude, it's also possible that Chinese banks will also encounter difficulties in dealing with Tehran. The Chinese may also be unwilling to increase energy supplies from a country seemingly locked in a path of conflict with China's two biggest export destinations.
And the final wild card for China's crude imports is refining capacity. Last year saw China's refinery runs increase at a slower pace than apparent oil demand, resulting in a 48 percent jump in net fuel imports. However, additional refining capacity has been commissioned and more is scheduled to come on line in 2012. Assuming that there are no major unplanned disruptions, China will certainly have the refining capacity available to process more crude.
This could serve to boost imports, but this will come at the expense of net fuel imports, which ran at 286,000 barrels a day in 2011. If the bulk of net fuel imports are replaced with domestically refined products, this, together with incremental demand growth, could justify forecasts for crude imports to gain by 500,000 barrels a day in 2012.
But it's not yet clear whether Chinese refiners will use their capacity and importing fuel could remain cost competitive.