When Reuters reported earlier this month that Asian oil imports had declined moderately during the first half of the year, many, if not most, traders immediately turned their attention to China, the world’s biggest importer of crude.
During the first half of the year, China imported an average of 11.08 million barrels of oil daily. The amount, in absolute terms, is quite robust. Yet, because it was down from last year’s record daily average of 11.28 million bpd, the figure was interpreted as bearish.
There is a clear reason why China features so prominently in all oil demand forecasts and price moves: Its daily crude imports alone exceed what the European Union consumes on a daily basis. Demand forecasts appear to assume that China will keep using more and more crude, giving the country an outsized role in price trends.
Bloomberg just reported this month that the outlook for oil prices during the second half of the year was becoming increasingly uncertain because China’s demand growth had failed to deliver on trader and analyst expectations. The report cited the slower-than-expected restart of refineries after maintenance season, lower purchases by some major suppliers since the start of the month, and the possibility of a monthly decline in imports.
The possibility that the expectations may have been unrealistic given certain processes underway in China right now does not seem to feature in any way in media coverage. This fact keeps assures that China maintains the status as the biggest price-setter—comparable only to the U.S.—and essentially ignores the rest of the world, not to mention the natural consequences of rising oil prices.
“Rising crude prices could further dampen China’s crude-buying appetite,” Mia Geng, analyst at energy consultancy FGE, told Bloomberg. “Although we expect China’s crude imports to move sideways in the third quarter at around 11 million barrels a day, there is downside risk in the later part of the third and fourth quarters.”
In other words, just like any other importer, China is sensitive to prices, and the higher they go, the less oil buyers want to boost their purchases. It is an organic market reaction, and the moment oil falls, buying will likely resume, should end demand be there. Concern about that demand has bloomed this year on the oil market, as China’s economic growth—like its oil demand growth—appears to have failed to live up to overly optimistic expectations.
Its real estate sector trouble, which has led to lower construction activity, is an obvious example of this underwhelming growth, and the fact it is the biggest EV market is a leading argument for a long-term oil demand decline trade looming over the country. Even state oil major Sinopec expects demand growth to peak in three years.
To those who assumed that Chinese oil demand would keep growing indefinitely, it’s bad news, indeed. To those who realize there is no such thing as indefinite demand growth, it’s business as usual and there are no lofty expectations. A peak does not mean a drop off a cliff. It simply means the highest point. Just because China is about to reach it sooner than previously expected—if Sinopec is correct—it does not mean demand would immediately drop in the aftermath.
In other words, there is plenty of bullish potential on the global oil market, especially with EV sales slowing down pretty much everywhere except China, ironically. And that’s just car sales. A lot of future oil demand would be coming from the petrochemical sector. In fact, 60% of oil demand is already coming from petrochemical producers, driven by the urbanization of the Asia Pacific region, according to the Energy Institute's recent review of the industry.
China will continue featuring prominently in oil demand forecasts. Even when demand peaks, it would still be the world’s biggest importer of oil by virtue of the size of its economy. Yet it may be a good idea to bring those growth expectations down to more realistic levels, acknowledging that no economy can keep expanding at a constant rate, even under strong central government control.
There are, after all, other drivers of demand growth. The rest of the Asian economies are growing, and so is oil demand. That’s because the two are intimately linked. India has been noted as the future biggest driver of oil demand growth, even if in absolute terms it is a smaller consumer than China. Asia at large could take care of global demand growth for quite a while yet, even if they never book daily imports of 11 million barrels. Perhaps it’s time to stop fixating on China on all matters related to oil demand.
By Irina Slav for Oilprice.com