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It’s The Demand, Stupid! Is China About To Burst The Black Gold Bubble?

It’s The Demand, Stupid! Is China About To Burst The Black Gold Bubble? thumbnail

For months we have heard about how the oil market’s over-supply ‘glut’ has been removed thanks to OPEC/NOPEC’s production cut deal and the narrative of ‘global synchronous recovery’ has buoyed the demand side of the equation – sending crude prices to four year highs (helped considerably by an increasing geopolitical risk premium, that is now evident more in Brent than WTI).

However, the last couple of weeks have turned ugly for the ‘no brainer’ record spec longs in crude oil as prices have tumbled (and President Trump has complained)..

The 50% surge in crude prices – and concurrent rise in gas prices at the pump – has begun to worry some that demand destruction looms. However, as The Wall Street Journal’s Nathaniel Taplin reports, what investors may not appreciate is that demand growth is also poised to slow in the world’s largest net oil importer last year, China.

Chinese petroleum demand still appears fine. Growth bounced back to a healthy 9% on the year in April, twice the rate in March. April’s petroleum burn was flattered, however, by exceptionally weak demand in the same month the year before – and probably by the official end of the government’s winter pollution controls, which had given temporary shot in the arm to Chinese industry this spring.

Unfortunately the overall trend for the industrial and transport sectors – which together account for about 70% of Chinese oil demand – looks shaky.

Growth rates in freight traffic and electricity production both peaked in the third quarter of 2017, excluding January and February figures distorted by the Lunar New Year holiday.

Freight tonnage growth is now running at barely half the 11%-12% rate it reached in mid-2017.

Weakening global trade, driven partly by the slowdown in Europe, will put further downward pressure on those numbers.

Given that background, sustaining Chinese oil-demand growth at close to 10% in the second half of 2018 looks unlikely.

Furthermore, as WSJ notesthe weakening yuan, which makes oil more expensive for Chinese importers, isn’t likely to help.

In yuan terms, Brent crude is up 20% in the past three months alone. But Chinese benchmark diesel prices are only up 12%.

Unless China’s state-set benchmarks are adjusted higher in the weeks ahead, Chinese refiners may start to feel the squeeze and cut back on crude purchases.

As WSJ concludes, oil-supply growth – Venezuela and Iran aside – is suddenly looking a bit bubblier. If Chinese demand goes pop, oil prices and shares could be in for a rocky second half.


6 Comments on "It’s The Demand, Stupid! Is China About To Burst The Black Gold Bubble?"

  1. joe on Sat, 9th Jun 2018 9:55 am 

    Imho its time that real wages are allowed to rise at the expense of companies bottom lines. The disparity between rich and poor is driving the slow demand in Europe, where demand could be growing fastest on earth, it drags itself along. If the EU wants Europeans to love the EU, let their wages rise. Shareholders are not good for the improvement of gdp, they merely store wealth (and buy politicians)

  2. JuanP on Sat, 9th Jun 2018 10:01 am 

    ZeroHedge has always been systematically wrong on China’s future (and I am very careful about using the words always and never). Where China’s future is concerned ZeroHedge has zero credibility (pun intended).

  3. Outcast_Searcher on Sat, 9th Jun 2018 10:52 am 

    As if Chinese demand growth were going away. As if third world demand were 100% from China. (As if India didn’t exist, for example).

    Zerobrains gets almost all if its doomer financial positions wrong, as it’s all doom all the time for them, instead of looking at the actual trends at all objectively.

    Why should we believe the conclusion here? (Except for the nonstop Cassandras who constantly cheer anything they want to hear of course. However, their track record is even worse than zerohedge, since sometimes zerohedge actually reports credible news).

  4. Boat on Sat, 9th Jun 2018 3:58 pm 

    Prices are going to stay high and go higher as long as OPEC/Russia collude to gut production. Venz is also losing production with their oil industry going bust.
    Trump could play hardball giving the Saudi the choice of pumping more oil or shutting down US assets.

  5. Sissyfuss on Sat, 9th Jun 2018 10:33 pm 

    OS, the myth of Cassandra entailed her being able to correctly prophesize the future and cursed that no one believeed her. Perhaps a more correct allusion would be to Chicken Little who was also correct after many false alarms. Hell, you could go with Erlich too, for he will be proven correct eventually.

  6. kanon on Mon, 11th Jun 2018 4:38 am 

    The rate of growth may be less than last year, but it is still a rate of growth. Thus, we continue on the path to destroying the environment our civilization needs. I agree that zerohedge has been consistently wrong on China, like most U.S. pundits. Ruling class propaganda disparages competitors, no matter how capable or successful. China uses a government controlled money system rather than the private (actually very private) control system in the U.S.

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