In 2008, as Beijing geared up for the summer Olympics by stockpiling crude oil, the world blamed the Communist government for inflating prices. Now eyes are back on China, wondering if demand from the Asian nation will bolster falling crude prices. With oil prices falling to their lowest level in years, the Chinese are taking full advantage of cheap imports, but sluggish underlying demand and limited reserves means China can’t continue to soak up the world’s excess oil indefinitely.
According to independent price reporting organization Platts, China’s crude imports soared to 7.18 million barrels per day in December, the highest level recorded, and boosted annual imports to an average of 6.19 million barrels per day. This was the closest China has ever come to surpassing US oil import volumes (the US imported 7.53 million barrels per day over the same period). Here are a few areas to watch in the coming months:
High Import Levels: Elevated levels of imports are likely to continue, according to a research note by Bernstein Research. “Oil imports…show no sign of slowing down as the fall in oil prices stimulates additional Chinese demand,” according to the report. This is despite lackluster growth in underlying demand, estimated at just 2% last year. But don’t expect imports to continue unabated – there’s only so much capacity for storage. Additions to its strategic petroleum reserves are likely contributing to the uptick in imports but an additional 100 million barrels of storage capacity isn’t likely to be ready until the end of next year.
While Beijing remains weary of exacerbating its import dependency on crude oil (this hit 59.6% in 2014, according to Sinopec), it now looks cheaper for China to import crude than produce it domestically, according to Bernstein. Chinese crude oil production costs are estimated at $50 per barrel for both Sinopec and PetroChina. Expect to see inflated crude imports as long as import costs remain below Chinese production costs and China has excess storage capacity.
Falling Capex: The fall in oil prices means Chinese producers will need to aggressively cut capital expenditure plans in the coming year, but the real story will be whether China’s state-owned oil companies use this opportunity to buy up assets.
The Impact on Natural Gas: Concerns that oil will displace natural gas use have already surfaced. China’s budding shale gas industry – which faces geographical, technical and policy hurdles – is likely to feel the impact from falling oil prices. China’s total gas production has increased steadily over the past decade, with a 10.7% jump last year, according to Sinopec.
Gasoline’s Complicated Story: While historically China consumed more diesel than gasoline, refiners that can shift their production in favor of the latter have seen higher margins in recent years. Still, China’s seemingly insatiable appetite for car ownership – the driving factor for gasoline demand – is colliding with concerns over air quality and congestion (cities nationwide have been brought to a complete standstill during waves of heavy pollution). The latest city to limit car ownership is the southern industrial powerhouse of Shenzhen. The city announced late last year that it would cap new licenses at 10,000 per year, to be dolled out in auctions and lotteries. To put that in perspective, the number of private cars increased by 16% yearly to 3.14 million cars (and around 1 million parking spaces), according to domestic reports.
