The market can't count on a Chinese rescue as prices fall
The markets are desperate for some good news. The oil price has fallen further and faster than nearly anyone thought possible a couple months ago
Wall Street can't cut its forecasts fast enough. Oil companies are laying off workers by the thousands and taking the axe to their budgets. Hard times have hit the oil patch once again.
China, with its seemingly insatiable thirst for oil, has been a reliable source of good news for oil markets for years. Over the last decade, China has accounted for about half of new global oil demand, sucking in barrels from all corners of the globe, and helping to fuel an unprecedented bull run for the oil price. After the 2008 financial crisis, it was strong Chinese demand growth that helped to drag oil prices up off the floor.
But China isn't going to ride to the rescue this time. The country's economy grew by 7.4% in 2014; nice for most, but it was lower than the government's 7.5% target and it was the slowest rate of growth since 1990, when the country was hit by sanctions following the Tiananmen Square crackdown.
For those watching closely, the figures came as no surprise. President Xi Jinping is pushing a series of economic reforms aimed at shifting China away from the investment-led economic model that has supercharged growth for the past three decades. Instead, he wants to steer China towards a model of slower and more stable growth more akin to the West, where consumer spending drives the economy.
Still, the slowing growth rate has put Xi in the hot seat. He has come under pressure from some to inject fresh government stimulus spending into the economy to juice up GDP growth, even if it resulted in the sort of wasteful and environmentally destructive construction that is now seen as unsustainable for the Chinese economy.
But Xi has cast himself as an economic reformer in the mould of Deng Xiaoping. And he has given every indication that he is willing to accept slower economic growth to see through the reforms, which he sees as vital to the country's economy and the Communist Party's hold on power. Government officials and state media are calling it the 'new normal'.
Most analysts expect economic growth to continue to slow in 2015, with growth expected to fall below 7% next year. The steady rise of China's consumer and the slow ebb of heavy industry and manufacturing as the driver of economic growth will continue.
This, of course, will have lasting repercussions for the country's oil demand. In 2014, crude consumption grew at its slowest rate since the financial crisis, and 1990 before that. Final figures for the year are not in yet, but analysts at Barclays reckon demand rose by just 1.9%, adding around 190,000 barrels per day (b/d) of new demand. By contrast, China's oil demand averaged 6.5% a year from 2009 to 2013.
Little relief is seen coming in 2015. The International Energy Agency (IEA) is estimating 2.5% oil demand growth this year. Bernstein, an investment bank, takes a somewhat rosier view, arguing the low oil price will spur new demand and sees growth of 4%. Either way, growth will not return to the heady levels that oil markets have come to expect.
As the economic slowdown is evident in the oil figures, so is the economic restructuring. Diesel and fuel oil demand - closely associated with industrial and manufacturing activity in China - have flat lined since 2012. While gasoline - a proxy for the new middle-class consumer hitting the road - has taken over as the driver of domestic consumption.
However, gasoline demand only makes up about 20% of product demand compared to diesel's 35% share, so it isn't yet a large enough slice of total consumption to drive strong growth in overall demand. That could change in the coming years. Jefferies, an investment bank, reckons China will hit an inflection point around 2017, when there will be enough cars on the road to accelerate demand growth once again.
There are a lot of uncertainties hanging over this gasoline demand growth though. There is no doubt that car demand is strong in China. However, to address pollution and chronic road congestion, the government is pushing a raft of measures that could temper growth.
For instance, most major cities are pushing for a far more efficient and clean car fleet by offering incentives encouraging the take-up of electric and hybrid vehicles, as well as natural gas vehicles. China is also investing heavily, more so than anywhere else, in the sort of infrastructure to make widespread rollout of these vehicles a realistic scenario.
It is also taking far more heavy-handed measures. Nearly all of China's Tier-1 cities, such as Beijing, Shanghai and Shenzhen, have driving restrictions and strict controls on the numbers of new cars that can come onto the road each year. In Beijing, car buyers have to enter a lottery to win a new licence plate for their car. Only about 1% of entrants are successful. The lottery is so notoriously difficult to win, Beijingers joke that it is harder to win than the actual lottery.
These policies, and how they affect car demand, and ultimately oil demand, will be of keen interest to oil markets in the years ahead.
The wildcard for Chinese oil demand amid the oil price route is the country's strategic stockpiling. China is undoubtedly taking advantage of the low oil price to add to its strategic petroleum reserve. Even with sluggish consumption, oil imports hit a record high 7.4 million barrels a day (b/d) in December, nearly 1m b/d higher than the previous month and far outstripping refinery runs. A large portion of that extra demand almost certainly went into the country's strategic petroleum reserve (SPR). But the opacity surrounding China's oil data and the secrecy surrounding the SPR make it impossible to know how much.
Chinese imports could continue to surge in the coming months as the country takes advantage of low oil prices to fill its strategic reserves. It remains a long way from its target of having 90 days worth of demand in reserve. However, these higher import figures should not be confused with the return of the old days of surging Chinese oil demand.