Oil Weekly: What Is Driving the Rebound in Chinese Demand?

Summary

• Chinese oil demand has been strong. Rebounds in gasoline and jet fuel consumption have been the key drivers.
• Forecasts for global oil demand growth continue to rise.
• We think inventory builds combined with ‘surprise’ oil production increases from Iran and other sanctioned countries have prevented the oil price from rising.

What Is Driving the Rebound in Chinese Demand?

We use OPEC estimates of Chinese oil demand to break down the drivers of Chinese demand growth this year.

Near-term estimates of Chinese demand are often skewed to the upside as China does not reveal how much fuel production is used versus stored as inventory. Like the US, China also maintains a strategic petroleum reserve (SPR), which it uses frequently to manage oil import requirements when prices rise. Unlike the US, however, China does not reveal this data, making estimating Chinese demand even harder.

We think China has increased its SPR this year, taking advantage of cheap oil from Russia, and will look to draw down from the reserve later this year – diesel is the best example of this.

OPEC data shows that year-to-date demand for jet fuel has increased relative to last year’s average. Jet fuel demand is estimated to be at 0.86mn b/d this year versus 0.5mn b/d last year. Gasoline demand has also been strong, rising by 12% Y/Y to 3.46mn b/d (Chart 1).

Interestingly, demand for fuel oil has risen by almost 25% Y/Y. Private refiners have predominantly used Russian fuel oil as cheap feedstock as they hit crude oil import quotas. Meanwhile, demand for diesel, naphtha, and liquified petroleum gas (‘LPG’) also looks to have increased, but we suspect some of this has been stored as inventory. 

To sum up, China’s rebound has been strong, and should manufacturing growth rebound later this year, total oil demand could exceed 17mn b/d from current estimates of 16mn. However much of this rebound would be met via inventory drawdowns meaning the impact on the oil price would be limited.

2023 Demand Forecasts Continue to Rise

The EIA, OPEC, and IEA all released their updated forecasts for 2023 this week. Global oil demand continues to see upward revisions. Here are the takeaways:

EIA:

• The EIA revised its forecast for global demand up by 0.3mn b/d to 1.59mn b/d. This brings their estimate of 2023 demand to 101.01mn b/d.
• The forecast for US demand was revised down by 0.1mn b/d to 20.4mn b/d.
• Chinese demand was revised 0.4mn b/d higher, bringing 2023 demand estimates to 15.95mn b/d.
• Global supply was revised up by 0.3mn b/d to 101.37mn b/d.

OPEC:

• OPEC revised their forecast for global demand up by 0.2mn b/d to 2.35mn b/d. This brings their estimate of 2023 demand to 101.91mn b/d.
• Chinese demand was revised higher by 0.5mn b/d, bringing total demand estimates to 15.7mn b/d.  Note – OPEC are forecasting faster growth than the EIA but had a lower 2022 demand forecast.
• Estimates for Non-OPEC supply fell marginally by 0.1mn b/d to 72.61mn b/d.
• OPEC forecasts show under-supply of c. 1.8mn b/d a day in Q4.

IEA:

• Forecasts increased by 0.3mn b/d to 102.3mn b/d – keeping the IEA more optimistic than others this year. It expects Chinese demand to grow by more than 1mn b/d.
• Estimates for global supply rose by 0.2mn b/d to 101.3mn b/d.
• The IEA also estimated OECD inventories (our favourite measure for market-based inventories) rose in April by 21.1mn barrels to 2,807.7mn barrels.

What Is Stopping the Oil Price From Rising?

Given the positive revisions to global demand growth and cuts by OPEC+, why is the oil price not higher?

We see two key reasons.

First, inventories remain elevated against expectations despite robust oil demand this year. The US is the best example: total commercial crude and product inventories have risen in recent weeks to 1,268mn barrels and are now near their five-year average (Chart 4). This has been a bearish development.

Second, Iranian oil production has risen. While we know Russian oil has had no trouble finding its way to the market, Iran has also increased production. It is estimated to be at least 0.2mn b/d higher in May than at the end of last year (Chart 5).

We believe actual production is likely to be higher than reported as a portion of Iranian exports are sold via the shadow fleet. Moreover, estimates by Vortexa suggest that Iran has taken the opportunity to sell its floating storage into the market as talks open with the US around a renewed nuclear deal which added to global supply.

Venezuelan oil production has also risen.

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)