Finally someone has sniffed out a bit of positive news from the land of Mao. In its latest Oil Market Update, Oslo’s DNB Bank sent out a research note entitled: “Remarkably Strong Oil Demand in China in December and Last Five Months Despite Weakening Economic Growth.”
Torbjørn K
jus, the bank’s oil market analyst reported that the Chinese oil stock numbers for crude and key refined products indicate that while refined product stocks grew by 4%, crude stocks drew down 3.9%, translating to a very strong calculated demand growth for December.
“We calculate that year-on-year demand growth for December came in at a very decent 510 MBOD (including adjustment for the inventory change in refined products). This must be characterized as very strong, particularly since demand growth in the first seven months of 2014 was about zero. It is interesting to note that the average demand growth in China seems to have improved quite significantly since oil prices started decreasing. The average demand growth for the last 5 months of 2014 (Aug-Dec) came in at 440 MBOD in our calculations,” DNB said in its note.
Kjus attributed the strong oil demand to increasing gasoline consumption. His team calculated Chinese gasoline demand increased “a very strong 440,000 BPD in December, and we calculate that the second half 2014 demand growth for gasoline came in at 273,000 BPD vs 150,000 BPD in the first half of the year.”
“The end user price for gasoline in China has been lowered many times since the global oil price started dropping in July,” DNB said in the note. “Maybe we are now seeing some price sensitivity in China for the first time. Car sales have in fact increased from 1.7 million in August to 2.4 million vehicles in December (new record with a solid margin, the old record was 2.15 million vehicles) and as written above it is really gasoline demand that is performing in the second half of 2014.”
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Analyst Commentary
We are in our global supply-demand balance assuming 400 kbd demand growth in China for 2015 and as such that a lower oil price will support demand growth. For comparison we can mention that IEA currently assume only 258 kbd demand growth for China in 2015 which is weaker than the 274 kbd demand growth the agency reports for 2014. If GDP-growth is the only thing that matter for oil demand growth that may make sense but based on what happened through 2014 and noting that economic growth was weaker in second half than first half 2014 while oil demand was stronger in second half than first half, we do believe the IEA numbers for oil demand growth in China for 2015 will have to be revised higher in coming months.
Chinese crude imports increased a large 546 kbd in 2014 on the back of inventory stock builds. A large part of this was due to strategic stock builds. If all the missing crude barrels are dedicated to strategic stock builds that amounts to 131 million barrels for 2014. With low oil prices the Chinese will probably use the opportunity to continue to build both commercial and strategic stocks in 2015. Today it was reported that storage companies in China are set to boost commercial oil storage capacity by about 42 million barrels in 2015. And in an annual research report published two days ago CNPC says total commercial storage capacity is 307 million barrels and in addition the strategic storage tanks can take 141 million barrels. It was not said how much is currently in storage however, but based on reported data from Reuters/Xinhua News Agency we calculate that commercial crude stocks were about 165 million barrels at end December. We believe there is a very grey distinction between the commercial and strategic oil inventories in China since it is the same traders who buy the crude for both usages. If we add the 141 million barrels that the CNPC says is the strategic storage capacity with our calculated commercial storage of 165 million barrels we come remarkably close to the 307 million barrels the CNPC estimate is the total commercial storage capacity in China right now. If another 42 million barrels of storage is ready to be filled in 2015 it would require imports of 115 kbd which would come in addition to the imports required to satisfy the oil demand.
Torbjørn Kjus | Oil Market Analyst
DNB Bank ASA
Oslo, Norway
