China’s oil demand puzzles experts

Oil traders have long been accustomed to reading tea leaves for clues to the true state of fuel consumption in China, but even the savviest analysts are being tested this year by a befuddling mix of signals.

An unexpected second month of weak crude oil imports reported on Monday gave fresh vigour to the bears, who read it as a signal that refiners had overestimated demand; bulls are still enraptured by surging diesel and gasoline imports, which they say may continue as industries resume operations after the Olympics. Both could be wrong.

With major new refineries being started towards the end of this year, China’s crude oil import growth should accelerate but its massive products stockpiling will slow, cutting fuel imports.

Between the rapidly shifting trade flows and the lack of transparency around inventory levels, which were built up substantially ahead of the Olympic Games this month, traders will be hard pressed to determine whether a US-spawned economic slowdown is finally taking the wind out of China’s sails.

That’s a key question for oil markets that have risen six-fold in as many years, driven in large part by burgeoning Asian demand.

Some closest to the pump say the day has already arrived, nearly two months after Beijing surprised the nation with a near-18 per cent rise in subsidised gasoline and diesel prices.

“Demand is definitely coming off after the price hike. Among the worst hit is the transportation sector, which had been operating on razor-thin margins even before the increase,” said Qi Fang, a long-time independent dealer who owns a dozen petrol stations in Hebei province, near Beijing.

“Americans were screaming at $4 per gallon petrol and they are using less now. Chinese petrol is only less than 20 per cent lower, how can we sustain these kind of prices?”, said Qi, adding that his firm’s sales since July have dropped over half versus a year ago.

For the International Energy Agency (IEA), which yesterday maintained its fore cast for China oil demand at 8 million bpd this year, up 5.6 per cent, the situation is far from clear.

“Despite having gone through half the year, China’s demand trends remain remarkably opaque, posing a considerable risk to the demand forecast for H2,” the IEA said in its report.

With oil prices having fallen more than 20 per cent from their mid-July peak above $147, traders are searching for direction beyond the dollar’s gyrations, weakening US fuel demand, the Iran-West faceoff and this week’s Russia-Georgia conflict.

The unexpected seven per cent fall in China’s July crude imports in data released on Monday, the steepest drop in three-and-a-half years, helped drive prices below $114 a barrel.

But the falling prices could entice Chinese to restock in the coming months, especially with a host of new facilities set to be commissioned by offshore producer CNOOC and a joint venture between Exxon Mobil, Saudi Aramco and Sinopec Corp., which will start up a major new 240,000 bpd unit.

In a market more concerned about the supply of crude oil in the coming years than any immediate shortage of refined fuels, news of another 500,000 bpd of refining capacity starting up in China from later this year may give the bears reason to pause.

On top of that, following a nearly eight-month gasoline and diesel import spree aided by a temporary tax rebate from Beijing, state-run Sinopec Corp and PetroChina have amassed fuel inventories at levels unseen before, likely putting a dampener on purchases in the coming months.

If Beijing decides to remove a hefty tax rebate on crude and refined fuel imports in favour of more price hikes at the pumps, refiners would be likely to maximise crude runs at home while scaling back loss-making fuel purchases.

But six weeks since the policy was due to expire, domestic refiners say they’ve yet to be informed whether or not they will be granted more such subsidies, further muddying the waters.

The oil duopoly’s combined gasoline stocks rose by a quarter and diesel stocks jumped by nearly 50 per cent by end of June, in part to build up stocks ahead of the Olympics this and next week, reported by an industry newsletter run by official agency Xinhua.

The rare glimpse of stock levels, which China does not report, suggesting that actual demand for oil this year may be weaker than estimated.