FocusChina's role in oil demand may be overplayed - analysts

28 January 2010 15:14  [Source: ICIS news]

By Vinicy Chan

LONDON (ICIS news)--China has taken centre stage in the world’s crude oil market as demand from the US and other developed nations struggles to recover, leaving the onus to the world’s second biggest energy consumer to bring balance to oil fundamentals.

But that optimism might be exaggerated and will be challenged as China tightens credit growth aiming to prevent its economy from overheating, analysts said on Thursday.

"Oil demand in 2010 is definitely being driven by the non-OECD and by China in particular," said Jon Rigby, an energy analyst at investment bank UBS.

"China’s vast appetite for oil is producing impressive growth that we don’t have from elsewhere," Rigby added.

China’s thirst for oil imports hit a record high in 2009 and was expected to keep growing in 2010. Its monthly imports of crude oil averaged more than 5m barrels per day (bpd) for the first time in December, China’s trade data showed.

The International Energy Agency, adviser to 28 industrialised countries, predicted Chinese oil demand would rise by 3.5% every year until 2030, and that it would overtake the US to become the world's largest oil and gas consumer by 2025. And China’s National Energy Administration forecasted that demand would grow by about 4 to 4.5% this year.

However, analysts cautioned that this optimism might be overplayed.

"In terms of growth rate, China no doubt is the strongest, but there’s a difference between growth and absolute levels of consumption. When you talk about actual oil consumption, China is far from replacing the US," said Amrita Sen, oil analyst at Barclays. 

According to OPEC, China was expected to account for 8.6% of world oil demand in 2010, whereas 23.5% was seen coming from the US. China contributed 8% and 8.2% of the world’s oil demand in 2008 and 2009 respectively.

Despite forecasters such as UBS and Barclays highlighting the importance of emerging markets in Asia to drain unseasonably-high oil inventories, a tighter monetary policy and the phasing out of stimulus measures in China could also jeopardise a rebound in global demand.

"China doesn’t quite have the sophisticated policy tools to manage a soft landing," said Rob Carnell, Chief International economist at ING.

"When we’re worrying that lending is going from very rapid to almost zero, it opens up the possibility of the economy going horribly wrong."

Beijing's stimulus package and huge government spending on infrastructure projects, together with generous bank loans, managed to return the world’s third largest economy to red-hot growth by the end of last year, propping up domestic consumption of oil and other commodities.

But the question now is what growth rate the emerging giant will have if it puts the brakes on - whether China’s boom is sustainable, or a bubble likely to burst painfully.

Earlier this month, China raised the level of reserves banks were required to set aside, curbing their lending ability.

The global equities markets and crude oil prices tumbled on the surprise move, which sellers feared could slow the country’s growth and restrain its buying of raw materials.

‘I won’t put it in such a negative context. China’s growth is impressive. To make it more sustainable, measures such as a tighter monetary policy and lending restrictions are needed,’ said Sen.

‘I believe these measures will be carried out cautiously and gradually. A bursting will do no one good,’ Sen added.

($1 = €0.71)

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By: Vinicy Chan

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