The Dangers Of China’s Growing Oil Demand

China’s oil thirst continues to grow, despite the impact that U.S. tariffs are starting to have on the world’s second largest economy. On Saturday, preliminary data from China’s General Administration of Customs showed that China’s crude oil imports rose 15.7 percent year-on-year to record high of 10.48 million b/d in November. A report by commodities data provider S&P Global Platts said it was the first time China's monthly crude imports have totaled more than 10 million b/d. The previous record high was 9.64 million b/d reached in April 2018. On a barrels per-day basis, the report added, the inflow represents a 13.9 percent increase from 9.19 million b/d in October.

To put that number into perspective, China's 10.48 million bpd of oil imports is just slightly under Saudi Arabia’s record high oil production of 10.72 million b/d in November 2016, just before OPEC and its Russia-led non-OPEC allies started the production cut deal in January 2017.

However, if Beijing and Washington can’t agree on a trade deal within the 90-day time frame set last week after President Trump met Chinese President XI Jinping at the G20 summit in Argentina, economic slowdown in China, especially in manufacturing, will ensue, causing a drop in Chinese oil demand, and by extension, global oil demand.

Janet Kong, BP’s chief executive of oil trading operations in Asia, told Reuters in late September that ongoing trade tensions between China and the U.S. could slowly hit oil demand in the country. “Going into 2019, I worry about the impact of the U.S.-China trade war, manifesting itself slowly,” she said. “The trade war impact has not really shown up in the data anywhere, but it will show up gradually over time. So the supply shock is very sharp and prompt, while the impact from trade war is boiling over slowly.”

Glimmer of hope

Now that there is at least a glimmer of hope that trade tensions can be remedied, and a deal reached that will prevent the U.S. from hiking existing tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent, oil demand could remain robust while the country ramps up procurement of both American oil imports and U.S.-sourced LNG.

The brief respite in the trade war between the two sides has already allowed a window for Chinese oil companies to start importing U.S. oil again. Sources familiar with knowledge of the matter said last week that Chinese oil trader Unipec will start to buy U.S. oil in March, when the 90-day period reached between Trump and Xi ends.

“Chinese buyers who want to buy U.S. crude will rush to import the oil during this window,” a senior executive from Asia’s largest refiner Sinopec said, according to a CNBC report, adding that the oil has to arrive in China before March 1. “Oil prices are low, so it makes economic sense to store some crude as commercial inventories,” said the executive, who asked not to be named.

Worst-case scenario

Going forward, a worst-case scenario for not only China, but for global markets, particularly emerging markets, would be no formal deal reached by March 1, a likely possibility given Trump’s hard line over China’s trade imbalance with the U.S., as well as Beijing’s inability to concede in key areas that U.S. negotiators demand. Numerous U.S. demands are almost impossible for China to agree too, at least in the short term, since it would force the country to reconfigure how it trades and even how it implements government financial and economic policy. Likewise, too much acquiescence by Xi Jinping would weaken his status in the eyes of the Chinese populace just as he continues to build his leadership and power to levels not seen since the reign of Mao Zedong.

By Tim Daiss for Oilprice.com