So What’s The Deal With China? – The Oil Question

The Chinese economy remains in the news, and has been for a while, now that the uncertainty around what’s up ahead for the world’s second largest economy rises. One market that has suffered from the concerns over China’s economic progress is oil. I wish to tackle in these series of posts the relation of China to different markets – this time let’s start with oil.

It’s a common quote that when the US sneezes, the world catches a cold. When it comes to China, it may not be a cold when it sneezes, but it sure gives the world the sniffles – at the very least. And the oil market hasn’t benefited from the drop in China’s economic growth path. Sure, it’s mostly related to the changes in the supply – OPEC ramped up production – but the possible drop in demand of oil is another issue.

For China there is also the problem of obtaining data. If the market could receive reliable data about China’s oil demand and reserves, this could reduce some of the “known unknown” issues related to China’s oil market. The IEA new Executive Director aims at adding China to the IEA, which could stabilize the global oil market. After all, back in November, China reported it had 91 million bbl, which were enough for nine days, while the IEA requires each country member to maintain at least 90 days’ worth of oil import reserves.

Although the economic data that comes for China (manufacturing PMI, GDP, inflation, etc.) aren’t reassuring, China’s oil imports continue to pick up – back in June imports grew by 27%, year on year.  And in July imports grew by another 30%. So is the demand for oil falling? Are these data reliable? The jury is still out on that.

In any case, I will conclude these array of thoughts about China’s oil market, by stating that the energy efficiency of China has increased in recent years and if this trend persists in the coming years. And for now that’s where the IEA sees the market is heading. Because the oil demand is expected to rise by only 2.6% per annum up to 2020 —  nearly half the growth rate than in previous years. In other words, the country could continue use less energy per capita – so the growth in the demand for oil will diminish further. Not a rosy outlook either way.

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