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The OPEC deal might have revived oil prices for now, but a combination of elevated inventories and the threat of lower demand growth in China in 2017 could come back to spook oil markets as they recover steadily.
China’s strong crude demand has prevented oil prices from falling even lower during the 2-year oil price bust. An opportunistic buying strategy focused on filling commercial and strategic oil inventories as well as a strong demand from China’s teapot refineries that resulted in a ‘product glut’ have kept crude demand growth ‘’solid to steady’’ according to OPEC economists.
According to Marketwatch, China imported about 7.9 million barrels of crude oil per day in November, a little bit over 70 percent of its total crude oil demand.
The Chinese General administration of customs reports an 18.3 percent year on year crude import growth in November. Chinese demand for crude may continue to rise in the near-term as domestic production has plunged significantly, but a strong pillar of demand – China’s SPR – may already be fading. Platts however reported a 1.1 percent year on year increase of total Chinese crude demand in October of this year.
Oilprice.com reported in September of this year that while the Chinese SPR is rapidly filling up, the Chinese government has invested in extra storage capacity and energy infrastructure. According to the energy consultants at Energy Aspects, there is no near term limit to the SPR crude hoarding. Michal Meidan, a London based analyst predicted a fall in demand of 100,000 bpd to 300,000 bpd for the second half of 2016 at the time.
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Although no one really knows how full the Chinese SPR tanks really are, Energy Aspects estimates that an additional 150 million barrel commercial capacity will be added as more independent refiners are now allowed to import foreign crude. Oil markets should keep a close eye at changes in Beijing’s stance towards smaller independent refiners as they could make or break Chinese crude oil demand.
2017 could see oil rally towards $60 as OPEC follows up on its output cut deal, but in the mid-term, oil investors should keep an eye on China’s crude demand imports, independent refiner regulation and economic growth outlook.
By Tom Kool for Oilprice.com
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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations