Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
China’s growth slowing down, another risk for crude oil demand
20 February 2019
With China's economic growth near a three-decade low, having
reached 6.4% in 2018, there is a lot of concern about the global
crude oil market's performance this year. Without doubt, the impact
of the country's trade war with the US cannot be ignored, but
meanwhile there are several other parameters to consider. China's
heavy debt load might be the most severe one, primarily driven by
the slowdown of the investment-led governance system in parallel to
the strict pollution policy affecting both domestic demand and
export growth. In parallel to that, this emerging economy is
starting to mature into a developed one, making it rather difficult
for the growth rate to be maintained at such high levels as
experienced during the last decade. Beijing's efforts to stimulate
economic growth proved strong enough, but only to an extent, as
only retail sales and industrial production seem to respond
positively so far. The only solution for Xi in the medium-long term
might be to complete negotiations successfully and support his
country's businesses.
The temporary peace offerings meant that China could begin to
import US crude oil once again, after a 120-day break. The world's
leading importer and demand's major driver absorbed around 9.25 Mn
bpd during 2018, almost 10% up year-on-year. Demand is, however,
not expected to increase that fast in 2019, because of the trade
war and the economic slowdown. But there is another factor we
should not ignore. China's refineries, which were responsible for a
great share of the country's crude demand growth last year, now
seem to be rather oversupplied. Together with India, China accounts
for more than half of the short-term growth expected in the
refining capacity, increasing its market share fast against other
regions like Europe. This oversupply comes with a significant
consequence. China's profit margins drop, pushing some of the more
vulnerable refinery projects to delay coming online. This is
believed to allow them to minimize the damage, while supply is
being kept under better control. The country's market share moved
significantly higher during the fourth quarter of 2018, which
primarily referred to more volumes from the Middle East Gulf
heading to China.
Unipec is looking forward to returning to imports from the US,
as the company could take advantage of the historically low cost of
this cargo. We could see the first VLCC loading in the US with
destination to China next month, after the break taken during H2
2018. We can already see some volumes loaded in December, but still
referring to rather low levels. The interest now increases as the
country's refineries typically restock ahead of the New Lunar Year.
We'll have to wait and see if and when the trade flows will reach
the high-record reached in March 2018, when around 440 k bpd were
exported from the US to China. But for now, most if not all Chinese
buyers still hesitate to get exposed to any US barrels. Concern
will only slow down when Beijing pushes them to buy US crude. Till
then, Chinese buyers have a plethora of reasons to prefer barrels
from WAFR and MEG, including the shorter distance both laden and
ballast. But as OPEC supply tightens, there will be more reasons
for China to consider importing from the US.
What makes the US barrels so attractive against MEG and WAFR is
the significant discount against Brent, primarily due to the lack
of pipeline capacity which creates an oversupply of crude in hubs.
But as more pipeline projects will come online by 2020, the crack
spread between Brent and WTI will most probably narrow to USD 6 per
bbl in 2019 and USD 4 per bbl the year after. US production is set
to surpass 12 Mn bpd this year and 12.85 Mn bpd in 2020. Investment
in Texas, which produces 40% of the country's volumes, stand at USD
40 Bn. This will add 100 k miles of new pipeline capacity. Enabling
the country to distribute its production from West Texas to the
Gulf Coast, eliminating current bottlenecks, but will also reduce
the WTI discount, making USG to China voyages less attractive.
However, there is no doubt that this is a route with high
potentials and importance for both countries in the future.
Posted by Fotios Katsoulas, Maritime & Trade
Principal Analyst