The Rising Influence of Rising Affluence

[DewDiligence]

China’s Oil Demand Is in High Gear

http://online.wsj.com/article/SB10001424052748704405704575596743559257682.html

›NOVEMBER 8, 2010d
By BRIAN BASKIN

SHANGHAI—China is displaying some Olympic-size oil demand of late.

A swell of new car owners and double-digit percentage economic growth is spurring oil consumption across the country, and refineries are having trouble keeping up.

And for the first time since Beijing hosted the Summer Olympic Games in 2008, China this month may become a net importer of diesel. That demand spike—China was stocking up in case it needed backup fuel—played a role in oil's climb to its record of $145 a barrel.

This time, market participants believe China's demand may be more permanent. And that suggests the recent rally in oil prices may have a strong tailwind. Diesel is made from oil, so added demand for diesel means more oil will need to be processed. [Duh! What kind of readership does the WSJ have these days???]

Morgan Stanley analysts predict crude futures will top $100 a barrel next year, for the first time since 2008.

Oil prices hit a two-year settlement high Friday of $86.85 a barrel on the New York Mercantile Exchange, up 6.7% for the week. The Federal Reserve's monetary stimulus prompted the most recent gains, but China's demand for oil and fuel is likely to have a more lasting impact, said Paul Ting, a consultant specializing in China's energy sector.

"The real story in China is that there's massive shortages right now," Mr. Ting said. "China has experienced seven consecutive months of [fuel] inventory drawdowns. We're talking about massive, massive drawdowns."

If China imports more diesel, it will come on top of record oil imports. China is the world's second-biggest consumer of crude after the U.S., and is by far the largest source of new demand as developed-world economies have posted sluggish growth this year. Increased diesel imports also would cause global oil supplies to tighten.

Six months ago, China had enough fuel on hand to meet more than 36 days of demand. Today, inventories would meet 16 days, and that number is falling fast. Once imports begin to rise to rebuild dwindling stocks, the rest of the world will take notice, Mr. Ting said.

Goldman Sachs recently said China's limited refinery capacity additions after the fourth quarter and its stronger oil demand growth should make it a consistent net diesel importer from the second quarter of 2011.

Part of the reason is the demand for cars. Car sales shot up 19% between August and September, and 9.9 million vehicles were sold in China through the first nine months of the year.

China's economy also continues to outperform, with the World Bank raising its forecast for China's 2010 gross-domestic-product growth to 10%, from an earlier 9.5% [#msg-56320908] estimate despite interest-rate increases and lending restrictions.

Seasonal factors are playing a role in China's return to net-importer status in the diesel market. The fall harvest and an end to a summer fishing ban are both providing temporary lifts to demand. An energy-efficiency push by the central government has prompted local officials to limit electricity consumption, forcing large industrial power users to rely on diesel generators. The elements causing the tight market will linger well into December, and this will likely keep refineries' crude runs at record levels next month, said analyst John Chu with domestic energy information portal C1 Energy.

But the rise in China's oil demand, which took off more than five years ago, shows no signs of slowing. In September, China imported a record 5.7 million barrels a day of crude, up 24% from year-earlier levels.‹