China Drives Rebound In Global Oil Demand, But There’s A Catch

For many years now, the state of China's economy has been one of the most important determinants of the oil price. The vast disparity between China's oil needs to power its economy on the one hand, and its lack of oil reserves on the other, meant that it almost single-handedly created and sustained the commodities 'supercycle' seen over various extended periods from the early 1990s. This was characterised by consistently rising price trends for many commodities used in China's booming manufacturing and infrastructure build-out environment. China's economic growth-led energy needs resulted in its becoming the world's largest net importer of total petroleum and other liquid fuels in 2013. And, as late as 2017, China's high rate of economic growth allowed it to overtake the U.S. as the largest annual gross crude oil importer in the world. As of now, China accounts for around 15-20 percent of total global oil demand. A slew of recent data releases highlight that China's economic recovery from the COVID-19 years, and its demand for oil, is at a tipping point. 

On the negative side for those who want the oil price higher - which does not include any of the major Western countries, for reasons analysed in my new book on the new global oil market order - last week saw several worrying signs about China's post-COVID-19 economic recovery. According to figures last week from China's National Bureau of Statistics, industrial output rose by 5.6 percent in April from a year earlier. Although this was an increase on March's 3.9 percent figure, it was well below consensus analyst expectations for a 10.9 percent rise. Retail sales for the same period were also lower than expectations of 21 percent, coming in instead at a rise of 18.4 percent. The reason why such apparently decent figures were disappointing was that the base comparison month - April 2022 - was much lower than usual, as it was a time when many major cities were under COVID-19-related lockdowns. 

Related: Cheap Russian Crude Is Replacing Middle Eastern Oil On India's Spot Market

On the positive side for those who want the oil price higher, the International Energy Agency (IEA) stated at around the same time these disappointing Chinese data figures were released that it expects global oil demand to increase faster than expected this year to reach 102 million barrels per day (bpd). According to the agency, global oil demand - supported by rising Chinese demand - will increase by 2.2 million bpd year on year in 2023, some 200,000 bpd higher than its previous month's report. The IEA cited a notable recovery in China's road and air travel in March as a key driver behind a 450,000-bpd month on month rise in demand in the country, to a new record of 16 million bpd. It added that China's annual demand is set to average this figure of 16 million bpd for the whole of this year, up by 1.3 million bpd from 2022.

This thematic analysis broadly accords with the views of tried-and-trusted leading China analysts exclusively spoken to by OilPrice.com in recent years - but there is a catch that are two points that the IEA has not stressed. It is certainly true that a return to greater travel by all methods has pushed up China's oil demand, but there is a limit to how far this can continue to do so. Positively for growth as well were further signs that China's long-beleaguered property sector might be improving slightly. Although property price inflation remains in negative territory, prices continue to post monthly improvements, with 64 out of 70 cities now reporting monthly price gains, Rory Green, chief China economist for TS Lombard, in London, exclusively told OilPrice.com. This was seen again in figures released last week showing that new home prices in these 70 major cities dropped by 0.2 percent year on year in April, much slower than the 0.8 percent fall in the previous month. This was the 12th straight month of decrease in new home prices but the softest pace since May 2022.

This said, one thing the IEA does not stress is that the current economic rebound in China may not be like any other that has gone before. As also analysed in my new book on the new global oil market order, the first part of China's massive economic growth was founded on a huge energy-intensive expansion of its manufacturing capabilities. This also involved the mass migration of new workers from the countryside and into the cities, which required a huge energy-intensive infrastructure build-out. This change marked the second phase of China's economic growth mix. This continued for years, alongside the third phase of China's economic growth, which was the rise of a middle class that powered domestic consumption-led demand for goods and services. All these phases had the net result of increasing China's demand for energy exponentially. 

This time around, though, as highlighted by Green, China's central leadership is relying on reopening and the removal of negative policies - property, consumer internet, and geopolitics - rather than aggressive stimulus, to drive activity. "For the first time, a cyclical recovery in China will be led by household consumption, mainly services, as there is a great deal of pent-up demand and savings - about 4 percent of GDP - following three years of intermittent mobility restrictions," he said. For oil prices, he added, it is apposite to note that transportation accounts for just 54 percent of China's oil consumption, compared to 72 percent in the U.S. and 68 percent in the European Union. In 2022, net oil and refined petroleum imports were 8 percent lower by volume than the pre-COVID-19 peak, with infrastructure and export-oriented manufacturing partly offsetting lower mobility and less property construction. "Demand drivers should switch this year, with travel rising and property less negative, while infrastructure and manufacturing slow," said Green. "The certain outcome is an increase in oil demand - we estimate a 5-8 per cent increase in net import volumes - but this is unlikely to cause oil prices to surge," he highlighted. "This is especially as China is buying at a discount from Russia," he concluded.

This last point was tangentially touched on by the IEA. It noted that Russian oil exports reached a post-invasion high of 8.3 million bpd in April, suggesting that Russia is raising exports to help offset the lower market value of its crude. "By our estimates, Moscow did not deliver its announced 500,000 bpd supply cut in full […] Indeed, Russia may be boosting volumes to make up for lost revenue," the IEA said. According to official Chinese Customs oil import data, its crude oil imports from Russia rose 8.6 percent in April from a year earlier, to 1.73 million bpd. However, there are two crucial points to note about these figures, all of which are also analysed in my new book on the new global oil market order. The first is that - just as occurs with Iranian oil during its various periods of sanctions - oil kept in floating storage in and around China without having gone through Customs does not show up as imported oil in Customs data. The second is - as happened with Iranian oil rebranded as Iraqi oil - oil from Russia even if it does go through Customs can easily be rebranded by China as oil from a non-sanctioned country. In short, it may well be that China is already importing - and storing - all the Russian oil it needs and that this will continue to act as a drag on any oil price gains. 

By Simon Watkins for Oilprice.com

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