While OPEC is trying to ‘fix’ the supply side of the oil market, demand at one of the world’s top refiners is faltering in the summer—a season on which the cartel is pinning its hopes to speed up the drawdown in global oversupply.
China’s state refiner China Petroleum & Chemical Corporation, also known as Sinopec, is reducing its oil refining output by around 240,000 bpd between June and August—the peak season—due to weaker fuel demand and stiffer competition from privately owned independent Chinese refiners, Bloomberg reports, citing people in the know.
In the first half of 2017, Sinopec’s refinery throughput increased by 1.63 percent compared to the first half of 2016, the corporation said last week. Gasoline output rose by 1.36 percent on the year, while diesel production dropped by 0.79 percent. In terms of crude oil production, Sinopec’s output in the first half fell by 5.31 percent, with production in China down 4.07 percent, and overseas production down 11.52 percent.
Chinese customs data has revealed that the country imported 8.55 million bpd of crude oil during the first half of the year, or 212 million tons in total—a 13.8-percent annual increase.
But according to data compiled by Bloomberg, China’s apparent oil demand dropped by 0.3 percent in April 2017, with gasoline demand slumping 6.3 percent, for the first drop since September last year.
Estimates of faltering fuel demand growth in China and reduced refinery throughputs at Sinopec are coming at the worst possible time for OPEC, whose resolve with the production cuts is faltering. Related: OPEC Won’t Prevent Nigeria, Libya From Increasing Oil Output
According to the International Energy Agency (IEA), compliance among OPEC members slipped in June to its lowest level—78 percent—since the start of the deal, as not only exempt Libya and Nigeria pumped more, but also Saudi Arabia. Although OPEC’s biggest producer stayed within the limits, according to OPEC’s secondary sources, it did not overcomply with its share of the cuts as much as it had done in previous months.
In addition, Ecuador broke ranks with the OPEC cuts earlier this month, saying that it would no longer comply with the deal because it needs funds to increase budget revenues.
So, while OPEC is trying to close ranks, reiterating—at least recently—that deeper cuts won’t be needed, Chinese summer demand may not be as high as the cartel and friends had expected.
“Summer in theory should be the peak consumption season. But we’ve seen weak gasoline demand since April as well as huge competition from teapots,” Amy Sun, an analyst with commodities researcher ICIS-China, told Bloomberg.
Another analyst, Gao Jian at Shandong-based industry researcher SCI99, thinks that the oil market is no longer reacting to news about OPEC’s deal.
“It’s time to look over to the demand side. And on that front, with China’s fuel demand weakening, it basically means oil may stay lower for longer,” Gao Jian told Bloomberg.
Hopes were high for higher oil prices at the beginning of the year with the start of the OPEC cuts. Oil majors reported rising profits for Q1 2017, compared to Q1 2016 when oil prices had hit a low of below US$30.
But the oil price recovery also faltered at some point at the end of Q1 and early Q2, as it became evident that the glut was not diminishing as fast as it was expected to, and that rising U.S. shale output and continued recovery of production from exempt Libya and Nigeria were offsetting a large part of OPEC’s cuts. Related: Ecuador’s Defection From The OPEC Deal Doesn’t Matter
For the upcoming Q2 reporting season, Big Oil—Exxon, Chevron, Shell, BP, Total, Eni, and Statoil—are expected to report net profits roughly double compared to Q2 2016, according to analyst estimates compiled by Reuters. But compared to Q1 2017, second-quarter net earnings would likely be down by around 20 percent, according to the estimates.
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So Big Oil may have to resort to “more of the same” and continue cutting costs, analysts reckon, instead of holding out hope for higher prices in the short term.
And if Chinese demand growth is not as strong as OPEC and the market hope for, the glut could take even longer to clear, and oil prices could stay lower for even longer.
By Tsvetana Paraskova for Oilprice.com
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