By John Richardson
Libya might of course be a temporary factor, and it depends how you define what OPEC has actually already done, and what it might do in the future. Saudi Arabia has done most of the heavy lifting on reducing output to date. As US shale-oil production continues to ramp up will they be happy to carry on this role and in the process fail to get the prices they want whilst also losing market share? That would hardly help with their need to boost revenues ahead of the Saudi Aramco IPO.
But let’s set the supply side of the story aside for now and look at the other often overlooked side of the story, which of course is demand and of critical importance, Chinese demand for crude.
The above chart, from this excellent story by Guangzhou-based ICIS colleague, Fanny Zhang, shows growth in Chinese crude imports is estimated by ICIS to fall to 5% in 2017 from 13.6% in 2016. This would be the lowest since 2014 – when, of course, oil prices collapsed. History might therefore be about to repeat itself, as this Wall Street Journal article argues. Remember that it was weaker growth in Chinese crude demand, and therefore imports as China is a big importer, that was a big factor behind the 2014 collapse in oil prices.
So why does ICIS expect low growth in crude imports in 2017? As Fanny explains.
- China’s teapot, or independent, refiners may end up importing less crude this year than 2016’s record-high amount of 87.6m tonnes.
- Demand from the bigger state-owned refiners – Sinopec and PetroChina etc. – will be stable, rather than spectacular, this year. This will be the result of oversupplied local gasoline and diesel markets.
- CNOOC doesn’t see oil prices rising much above the current consensus for a 2017 average of $55/bbl, and so there isn’t a strong motive to further build China’s strategic reserves in order to hedge against higher prices. I think prices will likely actually start to fall again soon, and so this will provide a further disincentive to add to the reserves.
- China has said that its easy monetary policy is ending. This confirms my analysis that we will soon see an acceleration of economic reforms as Xi Jinping tries to repair the damage down by last year’s re-inflation of the credit bubble. We saw early signs of this in the January-February lending data. This will of course lead to slightly lower economic growth, and thus slower growth in demand for crude.
- Another an important factor is China’s foreign exchange reserves. China has to prevent a major further devaluation of the yuan against the US dollar in order to reduce the risk of a trade war with the US – and it cannot to throw any more foreign reserves at defending the value of the yuan following last year’s sharp decline in reserves as it defended its currency. China’s reserves crept above $3 trillion last month after eight month of straight declines. But China is still extremely anxious about further declines to the point where they breach $2.66 trillion. Many economists warn that below this level, China’s economy would struggle to function. The upshot of this is much-stricter capital controls to prevent money from flowing out of China as a means of propping-up the value of the yuan. And China doesn’t want its foreign reserves unnecessarily squandered on stocking-up on oil imports.
Once again, please, please careful out there.