It’s time to stop looking to China for increased oil demand

In its latest oil market report, the International Energy Agency revised its outlook for global oil demand. There was only one reason for this: slower growth in Chinese demand.

For years, China has been the biggest driver of oil demand expansion as its economy has soared. Now that seems to be over. And the world’s largest commodity market would have to adapt to a new reality.

“With oil demand in China appearing to be drying up and only modest increases or decreases in most other countries, current trends reinforce our expectation that global demand will stabilize by the end of this decade,” the IEA wrote in its report.

Attendees at the Asia Pacific Oil Conference also discussed what increasingly looks like long-term structural changes in oil markets, which Bloomberg called uncharted waters for many traders and executives. Indeed, for over a decade China’s oil demand has grown at such strong rates that traders and oil executives alike must have become complacent, assuming it would continue to grow at the same pace.

China’s centrally controlled economic model supported such assumptions, but only up to a point. Because this economic model allows for adjustments if growth targets prove elusive. This year, for example, the GDP growth target was 5%. That’s pretty solid growth, especially compared to European economies, but whenever real growth turns out to be less, it’s a disappointment and a bearish turn in the oil market.

For the second quarter of this year, China reported economic growth of 4.7%. That was seen as a weak figure, further evidence that the world’s biggest oil importer is still recovering from pandemic-related bottlenecks. The perception was supported by data showing that crude oil imports in the first half of the year were lower than last year – even though last year’s rate of imports was a record high.

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Here’s what would make life tougher for many traders and some executives: China’s oil demand growth is softening after a period of fat growth. This could very well have been anticipated as there is no economy that can permanently grow at double digits or single digits. However, it seems that it was not anticipated, hence the increasingly durable trend in the oil market.

“From a structural perspective, China now looks unlikely to be the giant for demand for oil and perhaps even other commodities that it once was,” Energy Aspects’ Amrita Sen and Livia Gallarati told Bloomberg on the sidelines of APPEC. “We remain confident that the government will not allow growth to collapse, but growth will undoubtedly be lackluster for the foreseeable future.”

Meanwhile, China’s oil imports are rebounding. In August, arrivals rose to the highest in 12 months, suggesting that the stagnation in the Chinese economy is not so deep after all. August 2024 import figures are still lower than the August 2023 average, Reuters’ Clyde Russell noted in a report on the data, by 7 percent.

Even so, at 11.56 million barrels per day, imports were still quite substantial. Part of the reason for the rebound has been lower prices, as Reuters’ Russell noted, and those lower prices may continue to fuel demand, as it is, for a while longer — until they start to bounce back. what supply is narrowing. Because it will shrink. Only a few look at the supply.

China has emerged as a weather vane for oil demand in a similar way to how it has become a weather vane for copper demand, thanks to sustained strong growth over the past two decades. However, for many oil traders, it seems to have become the only thing to watch when anticipating price changes. Supply has become almost irrelevant to such traders, and that may backfire — because OPEC+ is limiting production, and now US drillers are starting to slow in response to lower prices. After all, supply always reacts to changes in demand.

Indeed, some adjustment would be required to the reality that China’s crude oil demand is unlikely to continue growing at the same rates as it has grown over the past 20 years. Demand is likely to grow more slowly from now on. And the offer will respond. There is no producer, either in OPEC or outside, that wants to oversupply the market. Thus, drillers will moderate production to better match demand.

As for traders, they should probably get used to a reality where they have to watch more than one factor to try to figure out where oil prices are headed. China will of course remain an important element in the price forecast. It just won’t be the only factor everyone is watching, ignoring other factors such as the fact that Europe’s oil demand, while falling, is in extremely slow decline, meaning that Europe’s green will continue to contribute solidly to global oil demand for quite some time. one more time.

By Irina Slav for Oilprice.com

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