Is The Global Oil Industry Relying Too Much On China?

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By Irina Slav

Chinese oil imports are among the closest watched indicators for global oil demand trends in the world. That’s despite the fact there are things like seasonal factors affecting the country’s demand for oil and price considerations. The dominant narrative remains that if China is buying, all is well for oil, and prices will go up. If China is reducing its buying, the outlook immediately dims.

However, recently things have not been so clear-cut, as Reuters’ columnist Clyde Russell wrote this week. China’s oil imports in April, he said, were higher than they were a year ago but lower than they were in March. This made judging whether the Chinese economy was continuing on its strong growth path or the recovery path was losing steam more difficult.

Indeed, China’s April oil imports, based on early data, were up by 5 percent on the year but 11 percent down on the month. Official data from the country’s customs agency later revealed that April imports were actually lower on the year as well, by 0.2 percent. Even such a minor decline is enough to spark worry about China’s economy as dozens of observers and oil market players continue to pin hopes and plans on a constant, uninterrupted Chinese economic growth curve.

Even though April imports were down on the year—and on March—there are factors other than demand at play as they always are. It’s maintenance season for Chinese refineries. It, therefore, makes sense for their operators to reduce their crude intake, especially after months of record buying thanks to low prices.

Speaking of prices, these are on the mend, which is a deterrent for buyers who have gotten used to cheap and abundant crude supplies. Reuters’ Russell notes that estimates point towards China adding some 1.29 million barrels daily to its strategic and commercial oil inventories last year.

It is unclear whether it is still buying oil for its reserves because the country does not release inventory figures. According to Russell, import levels of below 10 million bpd are likely to mean China is not buying to add to its reserves. Import levels of over 11 million bpd suggest it is adding to inventories.

This question may be important for short-term oil trading decisions, but over the long term, it becomes less relevant. China’s oil consumption tripled over the last two decades, from 4.7 million bpd in 2000 to 14.1 million bpd in 2019, Oxford Energy said in a 2020 report on Chinese oil demand and the pandemic, citing data from BP.

What’s more, the country’s oil thirst will continue to grow in the coming years as well, regardless of its renewable energy plans and ambitions. This growth, according to Oxford Energy, will be slower because of the aforementioned plans and ambitions, but it will be there. And it will be important just how much demand grows.

“Whether China’s oil demand will increase by closer to 3 or 4 mb/d over the next two decades is extremely significant for global markets, especially in the context of the global energy transition and concerns about peak oil demand,” Oxford Energy analysts wrote. “Even a small adjustment in the outlook for a country that consumed 14 mb/d of oil in 2019 has huge ramifications for suppliers, refiners, and traders worldwide.”

The problem with outlooks is that they rarely—if ever—capture a complete picture of reality. For example, this report, like others, talks about electric vehicles, renewable energy, and petrochemicals as some of the factors that will determine future oil demand in the world’s about-to-be largest consumer.

The extent to which they will determine it, in reality, remains hidden from view: after all, while China is planning massive adoption of EVs and huge additions to its renewable energy capacity, it is also building new coal power plants to ensure a reliable supply of energy.

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