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Can Anything Replace China As Demand Driver For Oil?

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·4 min read
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That the oil-producing world is highly reliant on China's appetite is a fact we are reminded of from time to time. Last year, Chinese buyers dragged oil prices out of the doldrums single-handedly as they stocked up on the cheap commodity to fill reserves. Now, this overreliance is backfiring with prices down and likely to stay down because of China.

In all fairness, it is not so much China as it is the resurgence of Covid-19 in China that drove prices sharply down at the start of this week. Benchmarks hit the lowest in three weeks because of the movement restrictions that Chinese authorities imposed in response to the latest wave of infections. These included warnings against travel, flight cancellations, and curbs in public transport and taxis.

Naturally, all this would affect demand for oil, and it will not affect it favorably. Some believe it is too early to panic and sell oil.

"There is still plenty of uncertainty about how the Covid-19 situation in China will evolve and what this means for oil demand and prices," Reuters quoted ING Economic as saying in a note yesterday.

Yet despite this uncertainty, oil traders are on edge, and this edge is clear proof of the market's excessive reliance on China as a price stabilizer. Unfortunately, there are few alternatives to the world's largest oil importer as a price stabilizer. 

In fact, there are none.

Related: Big Oil Unjustly Under Fire For ‘Dirty’ Hydrogen

India is even more dependent on imported oil than China, satisfying as much as 80 percent of its domestic demand with imported oil. This makes the subcontinent an important factor in oil price-setting—there is no doubt about that. Yet, in absolute terms, India is a much smaller importer than China. Last year, India imported some 198 million tons of crude, equal to about 4 million bpd. In comparison, China bought close to 11 million bpd of foreign oil last year.

To be fair, China's import numbers were at a record, spurred by the equally record low prices, but India was importing more than usual because of the low prices as well, and it could not come even close to China's daily average.

Smaller Asian economies are also dependent on imported crude and taken together, this could be argued to be a factor in prices. This is why Asia as a whole is the biggest price mover along with the United States, which is the world's top consumer of crude. Yet within Asia—and globally—China is likely to remain the indisputable leader when it comes to moving prices.

Oil is currently trading below $70 a barrel after just weeks ago, Brent was making a grab for $80. True, Covid-19 cases are on a strong rise in the United States, but no lockdowns are being discussed there, so concern about oil demand should be much milder. What's more, the outlook for oil demand in the United States is quite bright as Congress debates a $1-trillion infrastructure bill that should boost demand for oil products, according to analysts.

The outlook for China is not that bright. Beijing is currently in the process of cracking down on the independent refinery industry, which accounts for a hefty chunk of total oil imports. Also, with prices much higher this year than last, and with excess fuel stocks, its import appetite seems to have tempered somewhat. Even so, in July, China imported more oil than it did in June, suggesting that the slowdown in imports that some analysts were predicting for the second half of the year may be yet to come.

If—or when—this slowdown comes, it will likely be relatively short-lived, judging by the effect of the first wave of Covid-19 infections on the Chinese economy. A fast rebound is something the Chinese seem to be experts in based on what we witnessed last year. This is certainly good for oil prices. It is also bad for prices because even the slightest suggestion of wavering Chinese economic growth can plunge prices down in the blink of an eye.

By Irina Slav for Oilprice.com

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