(Bloomberg) — For the first time in two decades, China no longer appears to be the driving force behind global oil demand, a development that is unchartered territory for many of the traders and executives gathered at the Organization of the Asia-Pacific Petroleum Exporting Countries oil meeting in Singapore this week.
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China’s economic performance is dire, with a struggling real estate market and weak consumer confidence as it struggles to recover from the pandemic-induced slowdown. This, combined with structural changes brought about by an aging population, the energy transition and a growth model less dependent on large infrastructure, means bad news for oil.
For oil traders and analysts, that represents a big correction.
“I had discussions with my traders in the company and I asked them one question: How long have you been trading? They would say 10 years,” said Janet Cong, CEO of Hengli Petrochemical International, the trading arm of China’s largest privately owned oil refiner. “My answer is, in a world where China is not a bullish factor, we don’t really trade.”
China’s rise to become the world’s largest oil importer has bolstered crude prices for decades and created business opportunities for merchants from Shanghai to Dubai to London, but tolerating slow and steady GDP growth — which may not even reach this year’s 5% target — is making that difficult to sustain.
China’s oil consumption is not expected to grow by more than 300,000 barrels per day in 2025, according to an informal Bloomberg survey of 10 analysts and traders conducted on the sidelines of the Asia-Pacific Petroleum Forum. That’s in line with the International Energy Agency’s latest forecast, which cut its estimate this week, and lower than the Organization of the Petroleum Exporting Countries’ forecast.
The poll showed an expected expansion of 200,000 barrels per day this year.
Respondents, who asked to remain anonymous because their opinions are not public, cited the growing adoption of electric vehicles, the steady rollout of trucks powered by liquefied natural gas and government restrictions on crude imports and fuel exports. Beijing also has little spare storage capacity to expand its strategic oil reserves.
Global oil demand growth is “slowing sharply” as the Chinese economy slows, the IEA said in a monthly report, with Chinese demand falling for a fourth straight month in July and fuel consumption elsewhere “slow at best.”
The story continues
‘half life’
“From a structural perspective, China is now unlikely to be the oil demand giant, and likely other commodity demand, that it once was,” Energy Aspects analysts Amrita Sen and Livia Galarati wrote in a note earlier this week. “While we remain confident that the government will not allow economic growth to collapse, growth will undoubtedly be subdued in the near term.”
Other APPEC attendees, including Henry’s Cong, pointed to the changing nature of oil demand. Chemical feedstocks to produce products such as textiles account for a third of total domestic consumption, about 5 million barrels per day, and that share could increase as road transport becomes greener. But the “half-lives” of these products are much longer than fuel, meaning less crude oil is refined over time, Cong said.
The grim outlook for China cast a pall over Asia’s biggest oil conference, its annual event in Singapore, as traders and refiners braced for lower profits with Brent crude hovering near $71 and the world’s second-largest economy showing few signs of an imminent recovery.
Still, China’s refining capacity continues to grow, with expansions of Sinopec’s Zhenhai refinery and China National Offshore Oil’s Daxi refinery, along with Shandong Yulong Petrochemical’s all-new greenfield facility, adding a combined 740,000 barrels per day of capacity.
But traders and analysts surveyed by Bloomberg said the world’s second-largest oil consumer will have to make do with processing rates below 70%.
Shifting Sands
No one is saying China’s fossil fuel consumption has peaked or dismissing the possibility that Beijing could boost growth. Saad Rahim, chief economist at Trafigura Group, said China is still adding 8 million to 9 million new internal combustion engine vehicles a year.
“To me, when you add a new vehicle, it doesn’t feel like a peak,” he said.
Others agree that there is still room for growth, even in a low-product-intensity environment.
“As the Chinese economy improves, we’ll see more discretionary driving,” said Sri Paravaikkaras, director of market analysis at Phillips 66 International Trading Inc. “But we should all accept that demand growth from China will slow over the next few years.”
On the Wire
Finance chiefs in Beijing are breaking with long-standing practice and testing new ways to jump-start the economy by stimulating demand amid growing threats to the country’s growth targets.
China is urging automakers to keep advanced electric vehicle technology domestically while building factories around the world to avoid punitive tariffs on Chinese exports, according to people familiar with the matter.
Typhoon Bebinca is expected to hit China’s east coast early on Monday, bringing heavy rains that could cause disruption to oil refineries and LNG import terminals and paralyze transport.
Shanghai lead futures may have hit bottom as Chinese smelters cut production to boost profit margins.
This week’s diary
(All times are in Beijing unless otherwise stated.)
Thursday, September 12:
China CASDE Monthly Crop Supply and Demand Report
Summit on China’s Belt and Road Initiative held in Hong Kong
China’s National People’s Congress Standing Committee meets in Beijing
Friday, September 13:
Weekly inventory of iron ore at Chinese ports
Shanghai Stock Exchange Weekly Stock, ~15:00
China’s National People’s Congress Standing Committee meets in Beijing
Saturday, September 14
China’s August new home prices, 09:30
China’s August industrial production (including steel and aluminum, coal, gas and power generation, and crude oil and refining). 10:00
Retail sales, fixed asset investment, real estate investment, home sales, unemployment rate
–With assistance from Yongchang Chin and Serene Cheong.
(Updated with details from latest IEA report in paragraphs 6 and 9.)
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