Oil Markets Could Be In For A Shock From China Soon

Oil Markets Could Be In For A Shock From China Soon

Courtesy of Nick Cunningham at Oil Price

Oil analysts and commodity traders watch the price of crude swing down and up, and are trying to figure out when and to what extent the OPEC “price war” will force supply reductions from US shale. Any insight into this development can clarify the trajectory of oil prices.

But, of course, oil market dynamics are complex and fluid. US shale supply is hugely important for oil prices, but one of the more underreported factors influencing the price of oil is the pace of demand growth coming from China.

Consumption of oil in China has climbed rapidly and consistently since it took off in 1990, accelerating into overdrive in the 2000s. The inexorable surge in demand caused oil markets to tighten in the lead up to the financial crisis, and then again in subsequent years as the global economy recovered.

The rise in US shale production managed to finally halt the climb in prices, adding enough supply to send prices downwards. Much of the analysis since last year’s bust has been focused on what is going on in Texas and North Dakota, as well as on key decisions made in Vienna every six months.

But the story in China has been overlooked. When it comes to demand, China is arguably the most important country to watch.

And despite accounting for much of the world’s growth in demand in the 21st Century, China’s oil imports have been all over the map in recent months. In April, China imported 7.4 million barrels per day, a record high and enough to make it the world’s largest oil importer. But a month later, imports plummeted to just 5.5 million barrels per day. Much of that had to do with Chinese refineries going offline for maintenance, suggesting that the slowdown may have been just a slight detour from China’s seemingly ceaseless climb in import demand.

On the other hand, China’s exceptionally high levels of imports could be temporary. China is in the midst of filling up its strategic petroleum reserve, a project aimed at stockpiling 100 days’ supply in a reserve by 2020. China has seized the opportunity of…