China has been the focus of attention for oil traders and industry insiders for years now, and with a good reason. The world’s largest importer of crude is as important for prices as is the world’s largest consumer, the United States.
Until the Covid pandemic, China’s direction was pretty clear, just like the U.S. direction: demand for oil was rising in a stable, uninterrupted way, with China at some point possibly even overtaking the U.S. in terms of consumption. And then Covid happened, and nothing was ever the same again.
The pandemic and the lockdowns governments chose to institute in most of the world decimated global demand for oil and marred the outlook for the future in uncertainty. Talk about GDP was replaced with talk of post-pandemic rebounds. And here, China was expected to do what it has done since the 90s—grow strongly and consistently. It did not pan out as expected, and analysts, in a way, lost their anchor to reality.
China has been recovering from the pandemic lockdowns a lot more unevenly than expected. Economic indicators, such as the purchasing managers’ index, have read below the growth threshold for months. And because China is such a focal point for oil price analysis, most market players in that field have assumed that China has a problem with oil demand. Only it doesn’t.
The assumption that kept oil prices depressed for much of this year was that China’s economy was not bursting at the seams as expected. The PMI reading has been below 50 for five months in a row. However, several subindices have moved above the growth threshold. Then, there are the direct oil demand indicators. Related: China’s Sinopec Says Peak Gasoline Demand Already Passed
In the first seven months of the year, China’s crude oil imports rose by 12.4%, hitting 122.4 million tons. And there was a good reason for these imports: demand for fuels in the world’s largest electric vehicle market has been a lot healthier than its purchasing managers’ index would suggest.
China’s recovery has been “significant”, S&P Global Insight’s Carlos Pascual told CNBC this week, noting it was demand for travel that drove the increase in oil demand rather than the manufacturing sector. Some, such as Bloomberg, would likely see that as a sign that China’s manufacturing sector is in the throes of death. Others might take note of the fact that demand for fuels in the world’s largest EV market is so strong despite the fact.
“China is down-shifting onto a slower growth path sooner than we expected,” Bloomberg Economics said in a research note this week.
“The post-Covid rebound has run out of steam, reflecting a deepening property slump and fading confidence in Beijing’s management of the economy. Weak confidence risks becoming entrenched — resulting in an enduring drag on growth potential.”
But what about the U.S. in that period? Inflation has only recently begun to creep down, PMI readings have stayed below 50 for not five but ten months in a row, and there are still fears of a recession. The key fact, however, is that despite the effective recession in manufacturing, U.S. energy demand has barely declined, Reuters’ John Kemp wrote in a recent column.
So, if manufacturing does not really affect energy, meaning oil, demand in the U.S., why should it be held up to such close scrutiny in China? It is perhaps out of habit that analysts are doing this, but there is also the issue of assumptions, yet again.
Bloomberg again noted that China’s purchases of liquefied natural gas on the spot market have been slower than expected this year. They were 11% higher than last year’s over the period January to August, but that was still lower than the figure for 2021, Stephen Stapczynski wrote, and heightened uncertainty about the coming winter.
The modest increase in spot LNG purchases may have something to do with higher pipeline gas import volumes from Russia. Gazprom, according to its chief executive Alexei Miller, accounted for over half of China’s gas import increase this year, which stood at 8% for January to July.
It may also have something to do with the increase in domestic gas production. While specific production figures are difficult to find, China has been putting a lot of effort into boosting the domestic supply of both oil and gas in order to reduce its reliance on imports. It has also expanded its long-term LNG purchase commitments, which will no doubt affect future LNG buying over the longer term.
S&P Global Insight expects China’s demand for crude oil to add 6.1% this year compared with 2022. This translates into close to 1 million bpd in additional demand this year. The rate of growth is seen falling sharply to 3.5% next year as the post-pandemic situation stabilizes.
S&P Global is not the only forecaster expecting strong oil demand growth from China. Virtually every forecaster agrees that the country is the largest driver of oil demand in the world right now, whatever its PMI and consumer sentiment data say.
It might be the smart thing to do to start paying more attention to the direct factors at play over oil prices rather than following economic indicator readings and making assumptions without any additional information. That’s the path to $90 Brent and a nasty surprise for those who had assumed China was done for because of its PMI.
By Irina Slav for Oilprice.com
- Oil Soars Above $90 As Saudi Arabia Extends Deep Output Cuts
- China’s Influence In Oil Markets Grows With BRICS Expansion
- From Boom To Gloom: China's Economic Momentum Dips