A Shift and a Slowdown: A Look Behind China’s 1H Oil and Gas Data

on July 17, 2014 at 12:00 PM

China Seeks Foreign Oil Supplies As Demand Surges

Data for the first half of the year is trickling in on the world’s largest energy consumer. Here, we take a look at the trends behind the numbers.

Crude imports are up, but that’s only half the story.

Imports of crude oil rose 10.2% to around 6.13 million barrels per day in the first six months of the year compared to the same period last year. That’s almost double the rate of growth in 2013.

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But the headline figures are misleading, according to analysts. Increased levels of crude imports are not the same as double-digit demand growth seen in the previous decade, driven by demand for products. Rather, much of the ‘extra’ crude is going into commercial storage or strategic stockpiles. (Strategic stockpiles are meant to protect countries against shocks to the global oil system, such as a trade embargo or extreme price fluctuations). Beijing doesn’t release concrete numbers on its strategic stockpiles, which it considers a state secret. Rather, the government publishes percentage changes that analysts use to guestimate the levels, so no one knows for sure how much of that extra crude growth was stockpiled and how much went to refineries.

Growth in refinery runs is timid, and companies have scaled back on expansion plans in the coming years. Still, more refining capacity should come online later in the year and analysts are expecting refinery runs to increase in the third quarter.

Data from China’s National Bureau of Statistics (NBS) shows refining runs were only 2.3% higher in the first five months of the year than the same period in 2013 (source in Chinese).  This is much slower than the growth in crude imports, but faster than estimates of overall demand growth.

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Refinery throughputs hide the more interesting picture that demand for certain products is waning while others is growing at a fast clip. Diesel is still the single largest component of Chinese oil demand, but demand for diesel has slowed in the past few years. (See chart) 

kate china 3Instead, an insatiable demand for cars in China is boosting gasoline demand, which is up about 10% year on year. Investment bank Bernstein expects the number of vehicles on Chinese roads to double to 250 million by 2020. Despite pushes for more fuel-efficient vehicles and complaints over air quality, this will continue to be a major driver for oil demand this decade.

Taken together, China’s oil demand is flat. Pricing firm Platts calculates total oil demand rose 0.2% over the first five months of the year to 9.85 million barrels per day. While overall demand is slowing – notable in itself – it’s the changing picture (the rising prominence of gasoline, the lackluster demand for naphtha – used in plastics – and a decline in industrial use of diesel) that holds insight for future trends.

While demand for oil holds steady, the prominence of natural gas continues to grow.

In natural gas, it’s not just a shift in use, but overall growth by industry, households and the transportation sector. Industrial demand, once powered by fuel oil and diesel, is increasingly relying on natural gas. As are a growing number of households that depend on the fuel for heating during the winter, when demand really peaks.

Demand for natural gas in the first five months of the year was up 9.1% to 75.6 billion cubic meters. A domestic push for increased production (up 11% in the first five months of the year) as well as diversifying supply routes are helping to drive the increased supply.