China has been the key driver of global oil demand this year. Consumption, as defined by output plus imports, rose by 7.8% (900,000 b/d) to 12.42mn b/d for the first seven months of 2017, around half of total global growth for the same period.
Falling domestic output means the country’s crude imports have grown even faster – by a whopping 1.06mn b/d (14.2%) year-on-year to hit a record 8.53mn b/d for January-July. China’s voracious appetite for oil imports has made the country key to Opec and its non-Opec partners’ hopes of achieving market ‘rebalancing’ through their output cuts from the start of the year. Without the strong growth we have seen in Chinese demand even the modest ‘rebalancing’ of recent months would not have happened (MEES, 11 August), and oil prices would likely be well below current levels.
But, look closely at the Chinese data and there is reason for Opec to worry.
Chinese oil imports are rising by much more than the country’s GDP figures would suggest is needed, pointing to a massive build to China’s strategic crude reserves. In other words the ‘stocks’ numbers on which Opec bases its rebalancing target – OECD commercial inventories – may only have been falling because Chinese state stockpiles are rising. And this stockpile-filling by definition can’t go on forever.
Not only has China’s GDP growth eased substantially in recent years, the country is also making major strides in reducing energy consumption per unit of GDP – so called ‘energy intensity,’ measured in megajoules per dollar (see chart). World Bank data to 2014 show this falling steeply, whilst data from China’s National Energy Administration (NEA), published 24 August, show a further 14.6% fall between 2013 and 2016, Reuters reports.
In other words, China’s GDP growth figures of 6.7% for 2016 and a forecast 6.5% for 2017 imply an increase in energy consumption in the low single digits. The IEA’s latest forecasts of 3.1% growth in Chinese oil demand this year and 2.8% for 2018 look about right.
This contrasts with the 7.8% figure implied by the output and trade stats, a figure which by definition takes no account of changes to stocks – pointing to the likely cause of the discrepancy. “The gap between net supplies to China... and reported refinery intake has been above 1mn b/d since February, implying continuous stock builds,” the IEA notes in its July Oil Market Report.
Chinese commercial oil inventories stood at 381mn barrels at end-June, up 21mn barrels on the start of the year. However, alongside these data – the only specific numbers available on Chinese stocks – the IEA notes somewhat euphemistically in its August report that “other implied Chinese crude stocks built strongly.” In other words the data point to a strong build in China’s strategic petroleum reserve (SPR). How big is the 64-million-yuan question.
Last September California-based Orbital Insight came up with an estimate of 600mn barrels of oil in Chinese storage (commercial and SPR) based on its analysis of satellite images as of May 2016. This is well below the company’s 900mn barrels estimate of China’s total oil storage capacity. But stock building has no doubt continued since. If – ballpark – half of the 900,000 b/d increase in China’s apparent demand is going into storage then this implies a stockbuild of almost 100mn barrels for the first seven months of 2017 alone.
It is not hard to come to the conclusion that China has taken advantage of low oil prices to fill its crude inventories. But, not only can stock building not last forever, the denouement – which would be evidenced by a sharp drop off in Chinese crude imports – could happen sooner rather than later. If and when that happens then Opec’s market rebalancing efforts will get a whole lot more difficult.
