FocusChina's economic recovery helps fuel crude rally – analysts

By Bohan Loh and Judith Wang

SINGAPORE (ICIS news)--China’s efforts to build up its crude reserves amid signs of a pick up in economic activity may have been helping the rally in oil prices, analysts said on Friday.

The world’s third largest economy took in 5% more of the valuable energy commodity totalling 17m tonnes in May from the same period a year earlier.

“The trend on imports was spectacular,” said Song Seng Wun, regional economist from Malaysian brokerage firm CIMB-GK.

China could be taking advantage of the current energy commodity prices of energy commodities to ensure ample stock, before they run up much faster as the global economy recovers from a deep recession, analysts said.

State-owned Sinopec and PetroChina have been maintaining more than four weeks’ worth of commercial crude reserves in recent months to avoid any potential strains in price levels, said Wang Aochao, analyst from brokerage firm UOB Kay Hian.

“China has also been building up its strategic reserves since the beginning of the year,” said Wang. The country does not disclose the level of its strategic reserves.

While crude has been heading north, prices remained significantly lower compared to levels around the same time in 2008, analysts said.

Oil hit an eight-month high of above $73/bbl on Thursday on growing evidence that demand is recovering, with the weakness of the US dollar providing additional momentum for commodity prices to rise. OPEC’s curbs on supply were also supporting the strong crude gains.

Some analysts expect China’s crude oil demand this year could be even higher than in 2008 due to restocking at refineries.

The industrialization of the massive economy had made it the second biggest oil consumer on the world, next to the US. Demand from these two countries had been driving up crude prices until the financial and economic crisis hit the world in full force last year.

Hopes that the world economy is on the way to recovery were bolstered by the 8.9% growth in China’s factory output in May, the highest recorded since the onset of the crisis in October 2008. The country would be requiring more crude to run its massive manufacturing base.

The huge size of the Chinese domestic economy cushioned it from the full effects of the global demand slump that pushed its neighbouring export-oriented Asian economies into recession.

China’s 15.2% jump in domestic consumption last month was another positive news signalling that the fiscal stimulus measures have started to work its way into the economy, analysts said.

Commodity prices may continue to gallop in the months ahead following strong improvement in the mainland’s infrastructure investments last month, said Jun Ma, chief economist at Deutsche Bank. Urban fixed assets investment (FAI) in China surged 39% year on year in May.

“However, the lack of medium-term sustainability of this massive government-led investment growth is also becoming more apparent,” he said.

These investments would eventually and substantially cool off, said Ma, citing that China’s economy overheated the last time FAI grew by more than 40% in the 1990s.

“The expectations for a significant drop in FAI should also signal a consequential drop in crude prices,” he said.

Industry leaders at the recently concluded 14th Asian Oil and Gas Conference (AOGC ’09) cautioned that oil may fall again after the strong gains in recent months as the global economy is still weak.

“We have seen the worst of the [economic] contraction but it’s not a very strong bounce,” said Song of CIMB-GK.

“We may get a few quarters of growth but [it’s] because things were so bad before. Prices would probably fall off quite sharply in the fourth quarter,” he added.

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