FACTS: Chinese oil demand growth to slow this year

Nov. 28, 2005
Although China’s demand for petroleum products will continue to grow this year, the rate of growth may decline after unprecedented growth in 2004 of nearly 15%, said Fesharaki Associates Consulting & Technical Services Inc.

Although China’s demand for petroleum products will continue to grow this year, the rate of growth may decline after unprecedented growth in 2004 of nearly 15%, said Fesharaki Associates Consulting & Technical Services Inc. (FACTS Inc.) analyst Kang Wu in a recent report.

“Reliable data for the first half of 2005 has shown that demand growth has been slowing down significantly,” Wu said, adding that real petroleum products demand growth for the first half of 2005 was 5% and for the year as a whole will be 6%.

Factors such as economic growth, trade, automobile sales, the use of oil to generate power, and changing prices are influencing China’s oil demand.

China’s crude balance

China’s crude oil production and export rates show an increase this year, while import growth rates are slowing.

Domestic crude production grew slowly during 1990-2004, averaging 1.7%/year despite exceeding 3% in 1996 and 2002. However, 2005 will see growth in this area, as total crude oil production reached 3.622 million b/d in the first 6 months, up 5% from the same period in 2004 (Table 1).

“While it would be difficult for China to sustain 5% growth for the whole year, there is no doubt that domestic oil production is likely to be up by at least 3%, or over 100,000 b/d, for 2005,” Wu said.

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Import volumes, which quickly grew by more than 30%/year during 2003-04 over previous years, were up only 4.7%-2.563 million b/d-in the first half of this year over the same period for 2004. Crude imports for 2005 as a whole will exceed 2.6 million b/d, Wu calculated.

Long a crude oil exporter, China’s export volumes have been steadily declining during the past few years. The 110,000 b/d exported in 2004 was down from 377,000 b/d in 1995; 208,000 b/d in 2000; and 163,000 b/d in 2003.

However, for 2005, total exports likely will be higher than those of 2004, primarily because of the country’s rising offshore oil production, Wu said. During the first half, China exported 146,000 b/d of crude, up 18.4% from the same period in 2004.

Crude oil use

Crude oil use in China in 2005 will surpass 2004 volumes, but the 4.6% growth rate was substantially lower during the first half than the 14.9% growth rate for the first half of 2004, Wu reported.

China uses the bulk of its crude oil as feedstock for refineries, and crude runs have been growing rapidly. Crude also is burned for power generation and used directly in producing fields and in certain industrial sectors.

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“In 2004, the Chinese refineries processed 5.4 million b/d of crude oil, up from 2.2 million b/d in 1990 and 4.2 million b/d in 2000,” Wu reported. “For the first half of 2005, crude runs were over 5.8 million b/d, up 8.5% from the same period in 2004.”

Total crude supply-domestic crude production plus net imports-during the first half of 2005 rose to 6 million b/d. This was up 4.6% over the same period in 2004 when it reached 5.8 million b/d, which was up 14.9% over 2003.

China’s crude stockpiles, which built up in 2004, were drawn down in 2005.

“The difference between total crude supply and refinery crude runs...was high in 2004 (nearly 380,000 b/d) but relatively low for the first half of 2005 (191,000 b/d),” Wu reported.

Product balance

Last year China produced 5.365 million b/d of various refined products, up 12.6% over 2003 (Table 2). During the first half of this year, product output stood at 5.76 million b/d-8.5% higher than first-half 2004.

China became a net products importer in the 1990s, a few years before it became a net crude oil importer. In 2004, it imported nearly 1 million b/d of product, including liquified petroleum gas. However, during the first half of 2005, China experienced its biggest drop in product imports since the mid-1990s, Wu said. Total imports were 836,000 b/d, about 16.7% lower than imports during the same period in 2004.

Last year, China exported 287,000 b/d of petroleum products, primarily gasoline. That was down 14.2% from 2003 exports. During the first half of this year, however, its product exports surged by 47.1% more than the first half of 2004 to 380,000 b/d.

China’s net petroleum product imports were 461,000 b/d in 2003 and 680,000 b/d in 2004 but declined to 456,000 b/d during the first half of this year, about 38.9% lower than net imports for the first half of last year.

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“This drop in product imports, coupled with a rise in product exports, is one of the most important indicators of a slowdown of oil demand in China in 2005. To get a real picture of demand, all the indicators above must be combined,” Wu said.

Product demand

Demand in 2005 can be assessed by evaluating two factors:

• Apparent oil demand-domestic crude production plus net imports of crude and products.

• Apparent product demand-the output of refined products plus net product imports.

In 2004, China’s apparent oil demand reached 6.505 million b/d, up 15% from 2003. During the first half of 2005, however, China’s apparent oil demand declined by 0.4% to only 6.495 million b/d.

“This decline is a huge contrast to the high growth seen in 2004,” Wu said.

Last year, China’s apparent petroleum product demand reached 6.044 million b/d, up 13.5% from 2003. During the first half of this year, China’s apparent petroleum product demand grew by only 2.7% (over first half 2004), reaching 6.216 million b/d. Again, this growth is moderate compared with the high growth of 2004.

“Apparent oil demand cannot fully reflect the actual petroleum demand in China,” Wu said. “There was likely a reduction in crude inventory during the first half of 2005.

“Apparent petroleum product demand only partially reflects actual petroleum product demand in China (Table 3). We believe that China’s inventory of refined products also declined during the first half of 2005.”

Growth rate anomalies

There are several reasons China’s actual petroleum product demand grew faster during the first half of 2005 than apparent oil demand and apparent products demand might suggest, Wu said:

1. Economic growth was still strong at 9.5% during first-half 2005.

2. Overall merchandise exports continued to grow rapidly.

3. Government-implemented retail price caps on products discouraged refiners from producing more and led to inventory reduction at all levels. Despite high oil prices, the price cap provides some incentive to consumers who otherwise would face higher prices at the pump.

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China’s actual petroleum product demand growth during first-half 2005 was about 5%, or more than 300,000 b/d. This is considerably lower than the growth of the first half of 2004, suggesting that other factors, such as a decline in the use of oil for generating power, the slowdown of vehicle sales in 2005, and the increasing impact of the Chinese retrenchment program introduced in 2004, have restrained overall demand growth.

Positive demand growth in 2005 likely will be sustained because of continuous economic growth, growth in exports, the government’s likely retention of retail price caps for main products until yearend, and continuing high summer and winter demand.

Wu projects a base-case scenario of Chinese petroleum product demand growth at 6%, or less than 400,000 b/d (see chart, p. 27).

Under FACTS’s low-case scenario, growth may drop to 4% for the whole year, but under its high-case scenario, China would achieve 8% petroleum product demand growth, or nearly 500,000 b/d, by yearend.