Can anything replace China as the engine of oil demand?
The fact that the oil-producing world is heavily dependent on China’s appetite is a fact that is reminded us from time to time. Last year, Chinese buyers pulled oil prices out of the doldrums on their own as they sourced cheap raw materials to replenish their reserves. Now that overdependence is backfiring on falling prices and is expected to stay low because of China.
In all fairness, it was not so much China as the resurgence of Covid-19 in China that drove prices down sharply earlier this week. The benchmarks have reached the the lowest in three weeks due to movement restrictions imposed by Chinese authorities in response to the latest wave of infections. These included warnings against travel, flight cancellations and restrictions on public transport and taxis.
Of course, all of this would affect the demand for oil, and it will not affect it favorably. Some believe it is too early to panic and sell oil.
“There is still a lot of uncertainty over how the Covid-19 situation in China will develop and what this means for oil demand and prices,” Reuters said citing ING Economic in a note yesterday.
Yet despite this uncertainty, oil traders are on the alert, and this advantage is clear evidence of the market’s over-reliance on China as a price stabilizer. Unfortunately, there are few alternatives to the world’s largest oil importer as a price stabilizer.
In fact, there isn’t.
India is even more dependent on imported oil than China, meeting up to 80% of its domestic demand with imported oil. This makes the subcontinent an important factor in setting oil prices, there is no doubt about it. Yet in absolute terms India is a much smaller importer than China. Last year India imported some 198 million tonnes of crude, or about 4 million barrels per day. In comparison, China bought nearly 11 million barrels a day of foreign oil last year.
To be fair, the number of imports from China hit a record high, boosted by equally low prices, but India was importing more than usual due to low prices as well, and it couldn’t even come close. of China’s daily average.
Smaller Asian economies also depend on imported crude, and overall this could be seen as a factor in prices. This is why Asia as a whole is the biggest price factor along with the United States, which is the world’s largest consumer of crude. Yet in Asia and around the world, China will likely remain the clear leader when it comes to price changes.
Oil is currently trading below $ 70 a barrel after just a few weeks Brent grabbed $ 80. True, cases of Covid-19 are on the rise in the United States, but no lockdowns are discussed there, so concerns about oil demand should be much milder. In addition, the outlook for oil demand in the United States is quite bright as Congress debates a $ 1 trillion infrastructure bill that is expected to boost demand for petroleum products, analysts say.
The outlook for China is not that bright. Beijing is currently cracking down on the independent refinery industry, which accounts for a significant portion of total oil imports. In addition, with prices much higher this year than last year and excess fuel inventories, its appetite for imports appears to have moderated somewhat. Nevertheless, in July, China imported more oil than in June, suggesting that the slowdown in imports that some analysts predicted for the second half of the year may still be ahead.
If – or when – this slowdown occurs, it will likely be relatively short-lived, judging by the effect of the first wave of Covid-19 infections on the Chinese economy. A quick rebound is something the Chinese seem to be experts on based on what we saw last year. It is certainly good for oil prices. It’s also bad for prices as the slightest suggestion of a slowing Chinese economic growth can bring prices down in the blink of an eye.
By Irina Slav for Oil Octobers
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