Strong Chinese Demand Is Driving Oil Prices

The price of oil has been on a tear this year, with Brent crude recently breaching the $70-a-barrel mark on the back of tight production across the globe. However, there’s another reason that’s driving the recent rally in oil prices, and that’s strong demand from one of the world’s largest consumers of oil.

Chinese Demand Remains Robust

Demand for oil in China started picking up the pace earlier this year after it emerged that independent refiners – known as teapots – will start restocking feedstocks before prices rise further.

Earlier, there were concerns that a drop in vehicle sales in the country will hamper oil demand, but it seems that’s not going to be the case. Passenger car sales in China are expected to decline by around 5% this year, according to Reuters.

Crude oil imports into China, which is the world’s biggest importer of the commodity, will rise 4% in 2019 to 9.5 million barrels per day.

The resulting slowdown in gasoline demand will lead to an increase of just 0.5% in refined product consumption. However, crude oil imports into China, which is the world’s biggest importer of the commodity, will rise 4% in 2019 to 9.5 million barrels per day. That’s because refining throughput in the country is expected to rise to an all-time high of 12.7 million barrels per day this year, up 600,000 barrels per day as compared to last year.

So, what’s really going to drive an improvement in Chinese crude oil demand? Let’s take a closer look.

What’s Driving Chinese Demand?

As mentioned earlier, independent refiners in China are looking to restock oil supplies, and this is playing a key role in driving up imports. That’s because the refiners anticipate the government’s stimulus measures to boost demand.

According to the International Energy Agency:

In China, the economy seems to be reacting to the government’s stimulus measures with purchasing managers’ indices increasing and export orders recovering, although there are signs that air cargo volumes might be falling.

The Agency went on to add that “preliminary oil demand numbers for the January-February period show solid growth of 410 kb/d year-on-year.” By comparison, crude oil demand in India was up 300,000 barrels per day in India during the same period, while the U.S. witnessed an increase of 295,000 barrels per day on the back of an increase in petrochemical demand.

Clearly, the stimulus measures are working in China as the level of crude demand in this market shows. This, along with the fact that oil supplies will remain under control on account of OPEC’s pledged production cuts that are expected to last through at least June of this year, means oil prices could keep improving.

As a result, it won’t be surprising to see teapot refiners in China further increase their import levels as they try to lock in crude oil before it gets more expensive. This will further improve the demand-supply balance in the oil industry as the year progresses, and potentially lead to further improvement in prices.

In all, strong oil demand out of China is great news for the price of the commodity, which is why investors in oil equities should keep a close watch on how the country’s imports move going forward.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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