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Heard On The Street
China’s Dark Shadow Looms Over Oil’s Future
From the Wall Street Journal of Tue, 23 Dec 2014 00:20:00 EST

At the heart of global oil demand in China, there remains darkness.

Oil’s collapse in 2014 has been a tale of gushing supply, but it is worth remembering that investors started the year feeling jittery about slowing demand. That centered around China, the world’s largest contributor to oil demand growth in recent years. The problem for investors next year isn't only that Chinese demand still looks slow. It is also inscrutable.

Most observers can’t agree on how much oil China actually burns. A few days before 2014 ends, the International Energy Agency says China will consume 2.5% more barrels this year than in 2013. Wood Mackenzie reckons 3.4%. IHS Energy Insight thinks 2% and Barclays 1.1%.

Why the differences? Analysts infer demand by combing through refinery output, trade and inventory of products such as gasoline. This being China, questions surround most data, especially inventories, with guesswork often needed. Analysts are also sometimes watching different moving parts. IEA doesn’t adjust for inventory. Barclays, IHS and Wood Mackenzie do. Still their numbers differ.

Instead of agonizing over the precise magnitude of change, investors are left assessing its direction. Growth next year is likely, yet lackluster.

Beijing is already stimulating the economy, like with last month’s interest-rate cut. Plus, low fuel prices should themselves stimulate consumption. Though these figures deserve a grain of salt, Barclays, one of the least optimistic forecasters, estimates demand will grow faster at 1.9% in 2015. Wood Mackenzie says 3.3%.

But even the most optimistic forecasts aren’t high enough for what oil bulls have come to expect of China. When the economy boomed between 2009 and 2013, oil demand averaged 6.5% growth every year by Barclays’ measure. With China now burning one of every nine barrels of oil in the world, it is gotten too big to keep growing so fast.

Over the longer term, Chinese demand could even stagnate. Diesel, China’s most widely used fuel, which construction machines and coal-carrying trucks run on, looks set to register negligible growth in 2014 for the second year in a row, according to London-based Energy Aspects. With Beijing unlikely to unleash a blowout stimulus, construction and mining activity—and hence diesel use—may contract.

Gasoline consumption, which supported oil demand by rising 11.3% so far this year, may turn into a weak sauce, too. Passenger-car sales decelerated to their lowest in nearly two years in November.

That China’s crude-oil imports jumped 9% so far this year is a demand mirage. This is mostly because of a roughly 7% expansion in refinery capacity this year, according to Citigroup. Those refineries had to stay busy, so they imported crude that was processed and put back on tankers to sell to China’s neighbors.

In effect, China’s crude purchases stole oil-product demand from others and didn’t necessarily add to global demand. Next year, refinery additions will slow down and crude purchases could too.

China may continue to avail itself of low prices next year to import crude for its secretive strategic reserves. These purchases support oil to a degree, but hoarding isn't a long-term source of demand. And China is unlikely to fill reserves in a way that causes prices to rebound.

Cutting out the noise about data discrepancies and inflated imports, investors are left with a long-term signal of weaker underlying demand growth than they’ve come to rely on. China remains a reason for the oil market to stay dark.

Write to Abheek Bhattacharya at

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