Chinese demand not always what the numbers say

Bob Tippee
Editor

Everyone knows about China's new prominence in the global oil market.

A 15% surge in Chinese oil demand surprised oil traders and most market analysts in 2004 and helped boost crude prices. While last year's growth rate, at an estimated 2.4%, was more in line with the world in general, Chinese demand is now second only to that of the US and expected to keep rising as the economy expands.

As important as it is, Chinese demand is mysterious. Reliable data don't exist.

The International Energy Agency resorts to proxies for the Chinese demand numbers it publishes in its monthly Oil Market Report (OMR). There, Chinese demand equals refinery output plus net product imports.

That formula is important to sorting through new confusion in store for China observers.

On May 24, the Chinese government raised retail oil prices, which it controls. In a normal market, consumption growth should decline. But IEA's June report contains a reminder that the Chinese market is anything but normal.

Beijing pressures state-run Chinese refiners, which supply 90% of the country's oil products, to sell oil whether or not doing so makes money. Under the administered retail prices in place before May 24, refiners sustained losses running just enough crude and selling just enough product to meet state requirements.

By relaxing the disincentive, the May 24 initiative will encourage refinery runs. Output will rise and, because of the formula IEA uses in its estimate, apparent Chinese demand will increase.

This will happen even if real consumption weakens as it should in response to the retail price increase and the new output goes into storage—another dark data zone.

IEA expects the consumption response to become apparent later in the year. It projects demand growth from year-earlier levels at 8.6% in the second quarter and 5.6% in the second half. For transportation fuels only, apparent demand growth will be 7-9% for the second through fourth quarters.

Meanwhile, someone should alert oil speculators, known as they are to overreact at times to news events, that an imminent surge in Chinese oil demand may not be what it seems.

(Online June 16, 2006; author's e-mail: bobt@ogjonline.com)

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