October 2, 2015 / 10:18 AM / 4 years ago

COLUMN-Uncertainty about China hangs over oil rebalancing: Kemp

(John Kemp is a Reuters market analyst. The views expressed are
his own)
    By John Kemp
    LONDON, Oct 2 (Reuters) - Substantially lower oil prices are
on the way to rebalancing the oil market, as demand accelerates
and both shale and other non-OPEC oil production turns down.
    But how quickly the rebalancing is completed depends
critically on whether rapid demand growth reported in the first
half of 2015 can be sustained in the second half of the year and
into 2016.
    A fragile global economy threatens the progress of
rebalancing, Gary Ross, chief of PIRA Energy Group, told the
Financial Times in an interview published on Wednesday.
    Global oil demand is forecast to rise by 1.7 million barrels
per day (bpd) in 2015, according to the International Energy
Agency (IEA), which would be the fastest annual increase for
five years.
    The secretariat at the Organization of the Petroleum
Exporting Countries (OPEC) pegs demand growth at 1.5 million bpd
in 2015 compared with 2014.
    The U.S. Energy Information Administration (EIA) is more
cautious and puts demand growth at just 1.2 million bpd.
    In a measure of the uncertainty surrounding consumption, the
gap between the highest and lowest forecasts is equivalent to
0.5 million bpd, 30-40 percent of the entire projected increase
in demand.
    All three major statistical agencies forecast China will
contribute about one quarter of global demand growth in 2015,
underscoring the country's critical importance to the oil
market.
    But China also remains the biggest source of uncertainty
because it accounts for such a high share of growth yet its
economic outlook is so hard to forecast and its fuel data are so
opaque.
    The impact of any slowdown in China would be magnified
because of its trading links across the whole Asian region.
    
   Forecast growth in world oil demand in 2015 (million bpd)
   All data published in September 2015 
                              EIA     OPEC    IEA
 OECD                           0.4     0.4     0.5
     of which United States     0.3     0.3     0.4
 Non-OECD                       0.7     1.1     1.1
    of which China              0.3     0.4     0.4
 World                          1.2     1.5     1.7
    ex China                    0.9     1.1     1.3
       
    CHINA CONUNDRUM
    "A riddle, wrapped in a mystery, inside an enigma," is how
Britain's wartime prime minister Winston Churchill described
Russia in 1939, but it could equally apply to China's oil demand
in 2015.
    China's actual fuel consumption remains a matter of
guesswork.
    EIA forecasts China's oil consumption will increase by
around 300,000 bpd in 2015, less than 3 percent. The IEA and
OPEC put the increase slightly higher at around 400,000 bpd.
    All three agencies forecast demand will grow by 0.3-0.4
million bpd in 2016, according to monthly projections published
in September 2015.
    These numbers imply much slower growth in demand than the
data published by China's National Bureau of Statistics (NBS).
    China has reported to the Joint Oil Data Initiative (JODI)
that oil demand rose by a massive 1.3 million bpd, about 13.6
percent, in the first half of 2015 compared with the first half
of 2014.
    NBS reports some truly staggering increases in refinery
production of the main fuels in the first eight months of 2015.
    Gasoline production is up 11 percent, kerosene is up 21
percent, and diesel is up 4 percent so far this year compared
with the same period in 2014.
    
    LOST IN ADJUSTMENTS
    Problems with China's consumption data are well known,
including the country's refusal to publish how much crude is
being taken into strategic storage and the lack of adjustments
for exports.
    Estimates published by my colleagues put the amount of crude
going into strategic storage at as much as 0.5 million bpd so
far in of 2015.
    Once adjustments are made for strategic stocks and refined
exports, it is possible to come up with an implied increase in
domestic consumption of around 300-400,000 bpd, which is in line
with the major agencies ("China's crude imports are robust, data
are not" Sep 9).
    But there is enormous uncertainty surrounding all these
adjustments and the exact state of demand continues to baffle
statisticians.
    OPEC's latest monthly oil report gives an indication of just
how difficult it has become to work out what it is really going
on.
    "In July 2015, Chinese oil demand continued its high pace of
growth, increasing by around 500,000 bpd or more than 5 percent
year-on-year, despite signs of a slowing economy," OPEC wrote.
    Demand for LPG, jet/kerosene and gasoline all increased at
double digit rates compared with year before, though diesel
consumption was up only slightly.
    For the year to date, average demand has grown by well above
400,000 bpd "driven mainly by LPG feeding into the growing
petrochemical sector as well as gasoline, which was supported by
lower prices and robust car sales."
    Gasoline demand was up by 400,000 bpd in July, supported by
massive sales of sport utility vehicles, up by 44 percent in the
first seven months of the year, even as car sales rose only 3
percent.
    China's customers are choosing bigger and more fuel-hungry
vehicles as gasoline prices fall.
    
    ECONOMIC SLOWDOWN?
    The IEA tried to explain the same data issues in its own
September report: "Despite recent concerns regarding the
strength of the Chinese economy .... Chinese oil product demand
remains remarkably resilient."
    Fuel deliveries into the domestic market were up by around
550,000 bpd in the first half of 2015 compared with 2014, an
increase of around 5.2 percent.
    "Deliberate efforts to steer the economy towards additional
domestic consumption, at the expense of heavy
manufacturing/exports, has supported a swing towards more rapid
gasoline/jet demand growth versus lagging gasoil/residual fuel
oil," the agency explained.
    The IEA is nonetheless forecasting a sharp slowdown in the
second half of the year as the economic slowdown and stock
market turmoil bites.
    Car sales, business surveys and macroeconomic statistics all
point to a slowing economy, but the impact on fuel sales is
highly uncertain.
    The agency predicts year-on-year consumption growth will
slow from 5.6 percent in the second quarter to 3.7 percent in
the third and 2.3 percent in the fourth.
    
    INTEGRATING CHINA DATA
    Concerns about the completeness, quality and transparency of
China's statistics are one of the biggest challenges for oil
forecasters.
    In September, Fatih Birol, the IEA's new chief, broke with
tradition and made China the destination of his first overseas
trip rather than an IEA member country.
    Birol explained that the choice was no coincidence. "By
almost any measure, China is the most important player in the
global energy market," Birol told the Chinese Academy of Social
Sciences.
    Birol said that he wanted China to eventually become a full
participant in the work of the IEA, something about which China
has often appeared reluctant in the past.
    There are many areas where China and the IEA could benefit
from closer cooperation, ranging from energy security to climate
change.
    Birol did not mention statistical cooperation but it should
be a high priority because at the moment uncertainty about
China's fuel consumption and crude stockpiles have become the
largest error terms in global oil market data. 

 (Editing by William Hardy)
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