It's The Demand, Stupid! Is China About To Burst The Black Gold Bubble?

For months we have heard about how the oil market's over-supply 'glut' has been removed thanks to OPEC/NOPEC's production cut deal and the narrative of 'global synchronous recovery' has buoyed the demand side of the equation - sending crude prices to four year highs (helped considerably by an increasing geopolitical risk premium, that is now evident more in Brent than WTI).

However, the last couple of weeks have turned ugly for the 'no brainer' record spec longs in crude oil as prices have tumbled (and President Trump has complained)..

The 50% surge in crude prices - and concurrent rise in gas prices at the pump - has begun to worry some that demand destruction looms. However, as The Wall Street Journal's Nathaniel Taplin reports, what investors may not appreciate is that demand growth is also poised to slow in the world’s largest net oil importer last year, China.

Chinese petroleum demand still appears fine. Growth bounced back to a healthy 9% on the year in April, twice the rate in March. April’s petroleum burn was flattered, however, by exceptionally weak demand in the same month the year before - and probably by the official end of the government’s winter pollution controls, which had given temporary shot in the arm to Chinese industry this spring.

Unfortunately the overall trend for the industrial and transport sectors - which together account for about 70% of Chinese oil demand - looks shaky.

Growth rates in freight traffic and electricity production both peaked in the third quarter of 2017, excluding January and February figures distorted by the Lunar New Year holiday.

Freight tonnage growth is now running at barely half the 11%-12% rate it reached in mid-2017. 

Weakening global trade, driven partly by the slowdown in Europe, will put further downward pressure on those numbers.

Given that background, sustaining Chinese oil-demand growth at close to 10% in the second half of 2018 looks unlikely.

Furthermore, as WSJ notesthe weakening yuan, which makes oil more expensive for Chinese importers, isn’t likely to help.

In yuan terms, Brent crude is up 20% in the past three months alone. But Chinese benchmark diesel prices are only up 12%.

Unless China’s state-set benchmarks are adjusted higher in the weeks ahead, Chinese refiners may start to feel the squeeze and cut back on crude purchases.

As WSJ concludes, oil-supply growth - Venezuela and Iran aside - is suddenly looking a bit bubblier. If Chinese demand goes pop, oil prices and shares could be in for a rocky second half.

Comments

shortonoil One of We Sat, 06/09/2018 - 07:30 Permalink

When it doesn't you won't notice; you'll be too busy pounding the rocks together.

The world is now burning 9 barrels for every 1 it finds. Petroleum production has decoupled from world GDP. Whatever reserves remain will go into catastrophic decline within the next couple of years. 60% of the world's oil now comes from less than 1% of its fields, and they are on average over 70 years old. They are all pumping a huge amount of water in to get a little oily water out.

 

http://i67.tinypic.com/2cdeis6.jpg

In reply to by One of We

RationalLuddite MGTOW_MONERO_XMR Fri, 06/08/2018 - 20:45 Permalink

Everything is a derivative of oil, 

+50

Without net energy oil, gas, coal, we are back to the 18th Century in wealth and, probably, population.  Without net thermodynamic gain of these we largely will end up with wind and wood, horse and oxen, sailing and men's sweat, raw physical effort.  Understand - almost all our modern wealth is TOTALLY dependent upon high EROEI hydrocarbons.  Totally. 1 barrel of oil equates to about 6 years full time healthy male labour. Every barrel. Think about that as you contemplate if you would ever pay $1000 for a barrel of oil if you had to face the alternative of sending your goods to another city by ox train or tilling your 10,000 acres with manual labor instead. We will pay whatever it takes in the future so long as there is real (no fiat wealth redistribution slights of hand debt kicking down the road) net energy gain. It simply maths and physical reality kids.  

In reply to by MGTOW_MONERO_XMR

bshirley1968 RationalLuddite Sat, 06/09/2018 - 00:35 Permalink

And people in America don't understand the precarious position they are in every day. We pump half of the oil we use. Even a major war to secure a oil supply would cause a disruption big enough to alter our way of life....forever.

Think about it. 75% of our economy is based on consumption. And that consumption is in the form of running up and down the road shopping, delivery goods, and going to work. Any disruption to that way of life....any.....and nd we may never recover.

Even a disruption by way of higher cost could easily lead to a major economic collapse that we would never fully recover from. This energy matter is serious business, and most Americans just take it for granted. We don't have to go back to the 18th century.....oil became a big deal in the turn of the 20th century. A blip on the screen of human history.

In reply to by RationalLuddite

Jim in MN Fri, 06/08/2018 - 19:31 Permalink

Total BS.  The RATE of growth can slow but it still boils down to GROWTH. 

Global liquids have crossed 100 million barrels per day and aren't going to look back.

The oil majors all claim to have 'peak demand' in sight.  Total BS also.  It's simply a convenient story to get the enviros off their backs by pretending everyone will have Jetsons EVs in ten years.

LetThemEatRand Fri, 06/08/2018 - 19:32 Permalink

China is following the US example and building military presence in areas where oil may be located.  The US is following its own example in saying "hey China, what do you think you're doing building up a military presence around areas where our oligarchs may have oil?"

fulliautomatix Fri, 06/08/2018 - 19:39 Permalink

The "demand" being catered for is the tax imposed by .gov on refined products: too many national budgets go tits up if the barrel price drops. That said, I don't believe anyone has come to terms with the fact that plundering your tax-payers' disposable income through excessive taxation doesn't let your (national) economy do good things (grow, for instance). One step too many in the logic chain for the folk that "lead".

pachanguero Fri, 06/08/2018 - 20:04 Permalink

Bullshit at a high order.  What do we fight wars about?  solar cells !  oh wait............yep that's why I'm in over 300K RDS.A, XOM,CVX and gold stocks! Inflation baby!

snblitz Fri, 06/08/2018 - 20:38 Permalink

I am why the price of oil is going down.

Because I care so much for the environment, I replaced my F250 13mpg gas truck with RAM 1500 diesel that gets 23mpg.  My fellow californians also did the same thing switching to far higher mpg cars and trucks.

This lead to less tax revenue for the state as we all bought less gas.

The state of california rewarded us by raising the diesel and gas fuel taxes even higher to make up for the short fall.

F**k 'em.  I finally drove the extra distance and got Red Diesel for my farm equipment.  Saves, in California, about 90 cents per gallon.

(off road diesel equipment does not pay the california fuel surcharges if you can find someone to sell Red Diesel to you)

I am going to switch my gas generator (there is no "red gas" in california) to diesel.

Yen Cross Fri, 06/08/2018 - 20:43 Permalink

 Oil schleps are like 'Bearing Sea' crab.

  They just follow the biomass, then move on like a swarm of Locusts, to the next continental  ass raping.

Cutter Sat, 06/09/2018 - 07:47 Permalink

Apples and oranges.  A reduction in demand does not equate to negative demand growth, it just means reduced rate of demand growth.  There is still year over year increase in demand, if reduced.  

And, since the financial crisis we have not been conducting any exploration.

And shale is a very temporary phenomenon, with Bakken and Eagleford already peaked, and Permian to peak in the next 7 years.

Unless the world infrastructure flips to electric transportation in the next few years (not going to happen) we are heading for an oil crisis, not an oil glut.

hola dos cola Sat, 06/09/2018 - 18:43 Permalink

Trump complained, yes. That is what he said, in one tweet. (Gospel for you guys, right?)

Almost every action before and after resulted in upside pressure on the oil price. (Intentionally, in my opinion.) That is what he did.

 

And what's missing in the article is China recently significantly stocking up their oil reserves. On the one side a bit strange because just now their refinery maintenance season starts. On the other side either they expect higher prices when their demand strengthens again OR they might expect difficulties outright obtaining more oil in the market in the near future. This could signal they are anticipating higher geopolitical tensions, maybe even war.

hola dos cola Sun, 06/10/2018 - 04:18 Permalink

By the way, simple 'linear' analysis suggests the end of OPEC is near.

If that turns out to become reality, then Trump definitely had a hand in that*. Question: was that intentionally?

* 'Divide and conquer', using the hoofed one.

 

P.S. The world will be better of without OPEC in its current form, no doubt. They say to be about (oil price) stability, their actions proof that to be a lie. (from the smallest communiqué to production numbers to straight out wars and deaths, poverty and misery for any but there own.)