Oil demand recovers in China

"CHINA SETS THE tone as oil demand begins to recover" ran the headline to a special feature in OPEC’s March Bulletin.

A few days later the IEA’s Oil Market Report matched this with "China is poised to account for almost a third of global oil demand growth in 2010."

The energy watchdog for the OECD countries pointed out that apparent demand in January was up a massive 28 per cent year on year, and that record refinery throughput was noted in February 2010 ahead of reformation of the domestic pricing system.

This is all very good news for Africa, as together the two halves of the continent supplied one quarter of China’s total imports of crude in 2008. The People’s Republic had to buy in nearly a half of its total requirements in that year. With economic growth racing ahead and domestic output stalling that share could be significantly higher this year – and China is now the world’s second largest consumer.

Amongst the other points about the huge China market made by OPEC in its special ‘Newsline’ feature:

Imports of crude in January 2010 were up by a third compared with 1/09, to 4.03 mn bpd. But this was still 1mn bpd below the record set just a month before.

China’s 20-plus refineries are planning to add up to 560,000 bpd of new capacity this year, with combined throughput in January 2010 29 per cent higher year-on-year.

China has now overtaken Japan to become Asia’s largest importer of crude; soon it will become the world’s second largest economy, too.

Key drivers for the growth in demand for petroleum and products are the rapid increase in the number of vehicles on the fast-expanding roads, and the adding of a massive 90GW to the nation’s power generation capacity last year alone. Both factors are continuing.

To keep up with all this China’s own domestic supply of crude oil is falling further and further behind. Output in 2009 stood at just 3.85 mn bpd, with an average of only 3.90 forecast for 2010.

As a result China National Petroleum (CNPC) recently predicted that imports of crude in 2010 will likely be more than nine per cent up, to reach 4.24 mn bpd, with apparent demand itself rising by a more modest five points. And at the same time Chinese imports of natural gas – new import terminals make the reception of more African LNG a distinct possibility – are expected to increase so that they make up nearly a tenth of total demand.

OPEC itself predicts Chinese demand for oil rising by 6.24 per cent to 8.08 mn b/d in the first quarter of 2010, rising further to 8.69 mn in Q2 and peaking this year at 8.91 between July and September (and 8.61 mn bpd in Q4). This pickup was detected for the first time in the figures for the second quarter (Q2) of 2009, long before consistent green shoots were spotted in the world economy overall. "In December alone the country’s oil demand hit record growth of 17 per cent," it says, noting that this was stimulated by the first stage of the introduction of a new pricing system for products like naphtha and gasoil that guarantee a minimum margin for refiners. The International Energy Agency points out that this stimulation process has further to go.

Analysis from Infield Systems Ltd (Pushing boundaries, 2010) draws similar conclusions, referring to "dramatically expanding China’s supplies of international oil.

"Firstly," they say, "its strategy has focused on securing supplies of African oil."

It all sounds very rosy, therefore, but the huge China market for oil – 3.58 mn bpd of crude in 2008 as well as 0.81 mn bpd of products according to BP – is far from being in the bag.

First, because Beijing is showing plenty of interest in rival Russian/CIS energy supplies, which can easily be piped from the Caspian into remote Xinjiang Province and maybe, one day, from Siberia, too. Russian businesses have been keen to borrow from China’s massive sovereign wealth funds to finance their energy exports, to wherever the long-term prospects are best. LNG from Russia’s ultra-remote Far East started to reach Chinese terminals in 2009, too. And both parties play hard ball when it comes to negotiating contract prices.

Second, because the era of Chinese investment in African hydrocarbon resources may be coming to an end. ‘Oil for infrastructure’ deals have come to be increasingly critically viewed in capitals like Abuja and Luanda where the sort of terms offered by the IOCs are now being much more favourably viewed. Angola’s emergence as a key supplier was partly based on such terms. But selling the family silver seems to have gone out of fashion nowadays, notably in Libya where CNPC found the way barred to a purchase of key foreign assets.

China could easily pour balm on such hurt pride by stepping up the three-quarters of its oil imports it already (1998, that was) arranges elsewhere.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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