Analysis: China flashes signs of flagging oil demand growth

[HenryTo]

Thursday, March 31, 2005:

Analysis: China flashes signs of flagging oil demand growth

SINGAPORE: Oil demand growth in China, one of the pillars supporting record high prices, may be slowing more sharply than expected judging from a string of lacklustre market signals over the past month.

Oil traders are hard pressed to isolate any one cause of the slowdown in the world’s No. 2 oil consumer. But the warning signs are unmistakable: diesel exports have surged, gasoline shipments are on the rise and fuel oil imports remain below par.

Yet, commercial oil inventories — the missing link in assessments of end-user demand — are still unusually high after a wave of stockpiling in the last months of 2004, a strong indication consumption is not living up to high hopes.

“Chinese demand may not be as strong as everyone has expected. Otherwise, Sinopec wouldn’t be increasing diesel exports again and again,” a trader at a state oil firm said.

Even after a month of hefty exports, top refiner Sinopec Corp.’s end-March stockpiles of gasoline and diesel totalled 45 million barrels, a Chinese industry source told Reuters, fractionally lower than a month before.

These signals are all the more worrying as they come at the start of the second quarter, when traders say China should be importing more oil, not less, as many domestic refiners shut for maintenance and seasonal demand climbs. Along with hints that cooling measures are easing the red-hot economy slightly, they paint a darkening picture of China’s consumption, which many analysts have been counting on to help keep US oil prices propped above $45 a barrel this year.

“The market does not yet seem aware that Chinese demand, the principal engine of global growth, is showing clear signs of running out of steam,” said Deborah White of SG Commodities. “At $50 a barrel, we have reached the price level which adjusts demand to supply.”

First signs: The first signs of easing growth emerged this month, when official data showed oil demand for primary products rose only 5-6 percent in the first two months of this year.

This was marginally weaker than forecasts of an 8 percent rise this year, half the pace registered in 2004, when China’s 6.4 million-barrel-per-day (bpd) demand helped push up global consumption at the fastest rate in a generation.

The latest market indicators show a steeper slowdown extending into the early part of the second quarter, when demand typically spikes as farmers begin the planting season and fishermen take to the seas.

Oil dealers are most worried by diesel, which accounts for a third of China’s oil demand. Consumption surged by a quarter last year, largely due to its use for power generation amid the worst electricity shortage in 20 years.

While much of China is still plagued by brownouts, analysts say the power crunch should begin to ease, reducing oil demand for stand-alone generators — possibly one reason for the recent reversal in last year’s 40,000-bpd net import rate.

China is likely to become a net exporter of diesel for the first time since late 2003 this month, with Sinopec having sold some 140,000 tonnes of in both March and April. The refiner has all but disappeared from the import market, dashing expectations of a rebound following a lull in the holiday month of February.

Exports of gasoline also exceeded last year’s average by about 12 percent in March and April to about 150,000 bpd, Chinese traders said. China produces more gasoline than it can consume and domestic demand is half that for diesel.

While part of the export boom could be due to higher refinery processing rates and expansions, record-high domestic output seems unlikely to continue into the second quarter, when at least 100,000 bpd of refining capacity will be shut for maintenance.

Exceptions: Despite signs of a deceleration in demand growth, market sources caution against a rush to judgment.

Chinese oil firms may be in the process of aggressively whittling down oil inventories built up last year, which would imply relatively weak first-quarter demand, but not necessarily sluggish second-quarter expectations. Sinopec is working to get its gasoline and diesel inventories back to last year’s level, nearly a third below current stocks, which are equivalent to about four weeks of the refiner’s demand.

“About 32 million barrels might be a better level for the company, as it pays a lot of money importing crude and doesn’t want to spend more on storing products,” a trading source said. reuters

[rffrydr]

Well here we are again. That turned out to be inventory reduction. Fool me twice?
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Today is the Tomorrow you worried about Yesterday!