Forecasting China’s Oil Buying Grows Harder

ust northeast of this coastal city, the highway ends where guards block entry to one of China’s strategic oil reserves.

Behind a gate, mountains hide the site. As obscure as the view of Dalian’s oil-reserve tanks is the outlook for China’s oil demand. When benchmark oil prices tumbled last year—falling by more than half within six months—China rushed to buy.

The drop in price suddenly made it more affordable to fill stockpiles that the government and oil companies have set up to increase energy security. The effort gave a boost to global demand, contributing to 9.5\% growth in China’s crude-oil imports last year: tens of millions of additional barrels from the Middle East, Russia and elsewhere.

That buying has made the task of assessing true Chinese demand more vexing for oil companies, traders and governments. The purchases have clouded their view of Chinese refiners’ actual need for oil and how the pace of buying may shift.

The challenge is a typical one in a range of areas—Beijing maintains reserves of commodities from pork to soybeans to cotton—where China is an increasingly important player, but reliable figures on supply and demand aren’t always available.

China has become a huge importer of oil, soaking up more than the U.S. by some measures. Figuring out how much it might buy is vital to forecasting prices, especially because the global slump in oil has stemmed from worry over the outlook for demand.

“They’re building an awful lot of storage tanks that need to be filled,” said Thomas Pugh, a commodities economist at Capital Economics. When China will buy the corresponding oil is far from clear.

The economy is slowing, acting as a drag on the pace of growth in oil demand. Indicators suggest the increase in demand would have been slower without the stockpiling.

A lack of good data about the reserves is a “very big black box for global oil markets,” said Keisuke Sadamori, director for energy markets and security at the International Energy Agency. The agency mandates that its members, mostly wealthy, developed nations, keep 90 days of oil in reserve to cope with supply disruptions. While China isn’t a member, it has set up a similar program and has for years sought to fill the reserves, trying hard to keep the endeavor from driving up prices.

That effort got a boost this fall. In October, China National United Oil Corp. , a trading subsidiary of China National Petroleum Corp., the nation’s biggest oil-and-gas producer, scooped up a record 47 tanker loads, or more than 23.5 million barrels, as part of a buying spree on the Singapore spot market, according to Singapore-based traders. It hasn’t bought so aggressively since then.

The guessing about Chinese demand comes after more than a decade in which China’s need for imported oil soared as production plateaued at home. Investment in new projects globally shot up in response. Global oil production has risen more than 15\% since 2000, according to the U.S. Energy Information Administration, even as overall consumption in the U.S. fell during the same period.

Backed by China’s government, big state oil companies raced to lock down supplies overseas, forging close ties with producers such as Saudi Arabia and knitting pipeline networks to fields in Central Asia. For producers, Chinese demand has become even more critical as the U.S. replaces imports with oil and gas produced from beds of shale at home.

In the Indian Ocean last month, a tanker laden with Middle Eastern oil became the first to dock at a new Chinese port off southwest Myanmar. The China National Petroleum facility is the gateway to a pipeline that will soon pump tens of millions of barrels a year of crude to southwest China, cutting the time it takes to reach that market.

The same month, 2,500 miles away in China’s far northern province of Heilongjiang, the local government said that the Daqing oil field, which supplies about a quarter of China’s domestic production, would cut output by 11 million barrels this year. High-cost oil from the aging field was no match for the cheap crude available on the global market.

Still, even as China continues to soak up oil from abroad, growth in demand here is slowing as the economy decelerates. Demand grew by half a million barrels a day every year from 2003 to 2012. The IEA now projects those increases will halve by the end of the decade.

Before that downshifting began, “two out of every five barrels of global oil-demand growth was attributable to China, but the dramatic deceleration that followed weakened the hand of this key support,” the IEA said in its oil-market outlook this month.

Another indicator, China’s apparent oil demand—the volume of crude refined domestically plus net imports of oil products—shows a similar trend. After growing for a decade at a compounded annual rate of 6\%, the increase in apparent demand has slowed to 2\%-to-3\% in the past two years, a level it is expected to sustain for the next few years, according to the IEA and the U.S. Energy Information Administration.

With industrial activity down at home, China’s refiners already face a glut of products such as gasoline that analysts say will deter construction of new capacity, a gauge of future oil demand. Citi Research analyst Ivan Szpakowski predicts refining capacity will grow by 380,000 barrels a day this year, compared with 636,000 barrels a day last year.

Stockpiling for the strategic reserves remains a wildcard. A three-stage program initiated by the government last decade aims to build more than a dozen sites around the country by 2020. In a rare disclosure, the National Bureau of Statistics said in November that the facilities built in the first phase held about nine days of national oil consumption, out of a goal of 90 days.

CLSA analyst Simon Powell estimates that after the recent buying binge, strategic reserves now hold around 40 days of usage. Investment bank North Square Blue Oak, citing trade and production statistics, calculates that the level is as high as 50 days when commercial reserves are factored in. The bank estimates that the buying as prices dipped has saved the country billions of dollars.

Given the slower growth in demand, an already hard-fought battle among producing nations for the Chinese market is expected to intensify.

“The crude imported is not growing as fast as it was growing in the past because the demand is not growing as fast,” said Sushant Gupta, an analyst at energy consultancy Wood Mackenzie. “They will have to fight for that market share and be more price-competitive.”

In Saudi Arabia, for example, its exports to China plunged 8\% last year, as China imported more oil from Russia and elsewhere. In response, the nation has been offering discounts to Asian customers, say market analysts.

North American buying of oil from West Africa has plummeted, so Nigeria and other producers there have increasingly targeted China, which became the world’s biggest importer of African crude in 2014, according to shipping data. Production has risen, but China’s slowing and uncertain demand hasn’t been enough to absorb all of the oil. Unsold tanker loads are piling up at African ports.

“I’d love to know what’s going on in China,” said Ian Taylor, chief executive of Vitol Group, one of the world’s largest oil traders. “Energy intensity seems to be dropping off very markedly there.”
Source: Wall Street Journal