China stockpiling imports masks tepid oil demand
China’s oil imports continue to surge, but is it sustainable, and what are the long-term impacts?
China, the biggest source of world oil-demand growth, defied all expectations in May by importing a record 6 million barrels per day (b/d) of crude. However, the new high, up 18.2% compared with year-ago levels or 11% higher over April, reflects the nation’s increased stockpiling rather than signalling a rising domestic appetite and stronger economic outlook.
The Asian powerhouse is hoarding crude at its fastest rate since the Beijing Olympics four years ago. But the real surprise is that it has bolstered its emergency stocks at a time when oil prices have been trading near their highest levels in around four years.
Implied oil demand was up a slender 0.4% to 9.3m b/d in May from April, based on government data, as refineries pared crude processing for the second month in a row on mounting fuel inventories and poor demand. Domestic oil production was steady at 4.1m b/d, meaning close to 1m b/d has seemingly been stashed in strategic storage.
Demand growth slows
For the first five months of the year, China’s crude surplus averaged around 590,000 b/d or a total of almost 90m barrels -- its highest level since it added 99m barrels in the first five months of 2008 when refiners boosted stocks to ensure supplies for the Olympics. But this year domestic demand has been sluggish as retail prices remain relatively high and China’s economic momentum wanes.
Despite record-breaking imports, some traders caution that easing demand, if sustained, could start to erode the effect of stockpiling on future import numbers.
In June the International Energy Agency (IEA) downgraded its demand-growth forecast from 3.9% to 3.6% or 340,000 b/d for the year as a whole, to a yearly average of 9.7m barrels. Last year China’s demand growth stood at 4.9%, or 440,000 b/d, and demand hit 9.4m barrels. Expect more downward revisions if China’s economy continues to face strong head winds this year.
The Paris-based agency predicts demand to gather pace into the second half of the year, rising by 4.65% to 9.8m b/d. This optimistic assessment, however, is based on a fresh acceleration in industrial output and the widely held belief that the Chinese government will shore up the ailing economy.
Figure 1: China oil demand 2001-2011
In May inflation slowed and exports surged, but the country’s huge domestic economy showed a second month of anaemic expansion. Rates of growth in industrial production, retail sales and investment in fixed assets were all little changed from April. But trade was the bright spot. Exports improved 15.3%, triple the pace of April, and imports grew 12.7% after stalling the month before.
May’s data was sluggish rather than disastrous, and subsequent policy loosening should help boost economic growth in the second half.
In early June, China’s central bank cut interest rates for the first time since December 2008, when policy makers were deeply worried that they might be behind in responding to an economy slipping downhill faster than they expected. And Chinese leaders are behind the curve again this year, after two months of near-paralysis on economic policy this spring as the Communist Party wrangled over the fate of one of its own, Bo Xilai.
The big question now lies in how much policy makers are willing to ramp up government spending as well as lending by state-owned banks to offset the slowdown. China lent and spent heavily in 2009 to make the fastest recovery of any large economy from the global financial crisis. But the bill from that binge has since become due.
At first glance China’s rush to fill its boots seems counter-intuitive, as cargoes for May delivery would have been fixed in late March and April, when crude prices were at their highest. Brent hit its intraday high for the year above $128 a barrel in early March and traded above $120/b for the whole month, as well as most of April, ending that month at $119.47/b.
Given that in the past the Chinese tended to ramp-up oil buying when prices were relatively cheaper, it would have been reasonable to expect crude imports to ease as oil prices remained at lofty peaks. But the buying spree appears to have been prompted by Iranian jitters. China is the only major importer not to have secured an exemption to US financial sanctions, starting at the end of June, which target Iran’s oil trade in an effort to persuade Tehran to curb activities that could be used to make nuclear weapons.
A compromise with the US may well be on the cards, but analysts reckon China has opted for the prudent approach, ensuring they have ample supplies on hand should they be forced to cut Iranian imports altogether, which averaged more than 500,000 b/d last year.
Nic Brown, head of commodities research at Natixis Commodity Markets suspects that China may yet evade sanctions with importers negotiating attractive terms to take more oil from Iran. Beijing is understood to be negotiating with Iran to take a six-month deferment on payment for crude, equivalent to a $1.50/b discount per month, or $8/b off the going price.
While the market is now confident that any lost Iranian production can be sourced from other suppliers, this level of comfort did not exist in late March or April, when China was busy mopping up May cargoes.
Nevertheless, traders and analysts alike expect China to continue filling its strategic tanks while Brent hovers below $100/b. The IEA says some 79m barrels of new emergency capacity could be seeking crude this year, equivalent to 220,000 b/d of additional demand.
One thing is for sure, with Brent loitering beneath $100/b, China will continue to suck up more cargoes for its emergency stash. And don’t be surprised if its oil imports in June or July surge past May’s record despite faltering domestic demand expansion.