In its latest Oil Market Report, the International Energy Agency revised down its outlook on global oil demand. There was only one reason for this: slower Chinese demand growth.
For years, China has been the single biggest driver of oil demand expansion as its economy grew in leaps and bounds. Now, this seems to be over. And the world’s biggest commodity market would need to adjust to a new reality.
“With the steam seemingly running out of Chinese oil demand growth, and only modest increases or declines in most other countries, current trends reinforce our expectation that global demand will plateau by the end of this decade,” The IEA wrote in its report.
Attendants at the Asia Pacific Petroleum Conference also discussed what increasingly looks like long-term, structural changes in oil markets, which Bloomberg called uncharted waters for many traders and executives. Indeed, for over a decade, oil demand in China has been growing at such strong rates that traders and oil executives alike must have grown complacent, assuming that it would continue growing at the same rate.
China’s centrally controlled economic model supported such assumptions, but only up to a point. Because this economic model allows for adjustments in case the growth targets prove elusive. This year, for instance, the GDP growth target was 5%. This is pretty solid growth, especially compared with European economies, but whenever actual growth turns out to be lower, it is a disappointment and a bearish turn in the oil market.
For the second quarter of this year, China reported economic growth of 4.7%. This was taken to be a weak figure, further proof that the world’s largest oil importer is still recovering from the pandemic lockdowns. The perception was supported by data showing crude oil imports in the first half were lower than last year’s—even though last year’s import rate was a record high.
This is what would make life harder for many traders and some executives: China’s oil demand growth is softening after a period of fat growth. This could very well have been anticipated because there is no economy that can permanently grow at double digits or high single digits. Yet it seems that it was not anticipated, hence the increasingly enduring bearishness on the oil market.
“From a structural perspective, China now looks unlikely to be the behemoth for oil demand and perhaps even for other commodities that it once was,” Energy Aspects’ Amrita Sen and Livia Gallarati told Bloomberg on the sidelines of APPEC. “We remain confident that the government will not allow economic growth to collapse, but growth will no doubt be lackluster for the foreseeable future.”
Meanwhile, oil imports in China are on the rebound. In August, arrivals rose to the highest in the past 12 months, suggesting the doldrums that the Chinese economy is reportedly in are not that deep after all. The August 2024 import numbers are still lower than the August 2023 average, Reuters’ Clyde Russell noted in a report on the data, by 7%.
Even so, at 11.56 million barrels daily, imports were still quite substantial. Part of the reason for the rebound was lower prices, as Reuters’ Russell noted, and these lower prices may well continue stimulating demand, such as it is, for a longer period—until they start to rebound as supply tightens. Because it will tighten. Only a few are looking at supply at all.
China emerged as the oil demand weathervane in a way similar to the way it turned into a weathervane for copper demand thanks to it sustained strong growth over the past two decades or so. However, for many oil traders, it seems to have become the only thing to watch when anticipating price changes. Supply has all but become irrelevant for such traders, and that might boomerang—because OPEC+ is capping production and now U.S. drillers are starting to slow down in response to lower prices. Supply always reacts to changes in demand, after all.
It would indeed take some adjustment to the reality that Chinese crude oil demand is unlikely to keep growing at the same rates that it grew over the past 20 years. Demand will likely be growing more slowly from now on. And supply will respond. There is no producer, whether in OPEC or outside it, that would want to oversupply the market. So drillers will moderate production to match demand better.
As for traders, they would probably need to get used to a reality in which they need to watch more than one factor to try and glean where oil prices are going. China will, of course, remain an important element in price forecasting. It simply won’t be the one single factor everyone is watching, ignoring other factors such as the fact that Europe’s oil demand, while in decline, is in an extremely slow decline, meaning green Europe will continue contributing solidly to global oil demand for quite a while yet.
By Irina Slav for Oilprice.com