COM - China Remains Major Driver Of Global Oil Demand Growth

2023-06-14 23:54:51 ET

Summary

• China will remain a major driver of global oil demand growth in both the short- and long-term, which will have a positive impact on crude oil prices and energy producers.
• Data provided by market research firm Energy Intelligence and Fitch Ratings indicate that the end of COVID-19 lockdowns in China is having a powerful impact on crude oil demand.
• Rising energy consumption per capita in China will help offset potential headwinds arising from forecasted declines in the country's population.

In this article I will cover why China will remain a major driver of global crude oil demand growth going forward in both the near-term and long-term. The trajectory of energy consumption in China, particularly crude oil demand, will have a profound impact on oil prices ( USO ) and the financial performance of raw energy resource producers included in the SPDR S&P Oil & Gas Exploration & Production ETF ( XOP ) and Energy Select Sector SPDR Fund ( XLE ), which in turn will play an outsized role in the performance of energy equities.

Near-Term Considerations

According to the market research service Energy Intelligence, China’s estimated oil demand hit over 16.05 million barrels per day in April 2023 based on refinery throughput volumes (how much crude oil China’s vast downstream industry is processing) and net imports of refined petroleum products. Demand for petroleum products and ultimately crude oil is recovering robustly as COVID-19 lockdowns are eased , as figures from Energy Intelligence indicate that China’s oil demand was up more than 26% year-over-year in April 2023. The outlook for China’s oil consumption demand growth remains favorable in part due to recent efforts from authorities to reduce borrowing costs to further stimulate economic growth.

On June 13, China’s central bank lowered short-term interest rates as the People’s Bank of China cut the seven-day reverse repo rate by ten basis points (from 2.00% to 1.90%) which will soon filter through the broader lending environment in the country. Bigger picture, China’s banking authorities appear to be communicating to investors and the economy at-large that additional easing measures should be expected as supporting economic growth becomes more important than keeping leverage ratios and inflation in check.

These measures are coming at a time when the US Federal Reserve is showing signs that its cycle of interest increases may be coming to an end. On June 14, the Fed opted not to raise rates while communicating that two more “small” rate hikes should be expected by the end of the year (as compared the “large” interest rate hikes seen this year and last). Should the Fed end its cycle of interest rate hikes this year or early next year, that would help limit rises in borrowing costs both in the US and abroad, which supports the outlook for global economic growth.

Pivoting back to China, the country has been a key driver of oil demand growth for some time. According to BP p.l.c.’s ( BP ) 2022 Statistical Review of World Energy (the 2023 version is coming out on June 26), China’s crude oil demand grew from ~9.6 million barrels of oil per day in 2011 to ~15.4 million barrels per day by 2021, though demand in the special administrative region of Hong Kong fell by ~0.1 million barrels per day during this period, reaching ~0.3 million barrels per day in 2021.

Please note that these figures are not looking at China’s total liquids consumption, which along with crude oil includes biofuels along with derivatives of coal and natural gas. The aforementioned figures from BP are only taking crude oil demand into account. For reference, total crude oil consumption stood at 94.1 million barrels per day in 2021 according to BP, indicating that China has become a major part of the global demand equation over the past decade (as most of you likely know). When the US Energy Information Administration ['EIA'] cites total liquids consumption figures, that is slightly different than crude oil consumption. The US EIA forecasts that global liquids consumption will come in around ~101.0 million barrels per day this year, up from ~97.1 million barrels in 2021.

Adding over 5 million barrels of daily oil demand to the global economy (a figure that rises over 6 million when looking at data from the start of 2023) over the past decade is a big deal. Recent measures by banking authorities in China along with the tailwind provided by the country’s economy reopening after strict COVID-19 lockdown measures were introduced at the start of the 2020s decade should ensure China remains a major driver of oil demand growth going forward.

That will be driven by greater levels of domestic and international air travel, with data cited by Fitch Ratings noting that air passenger traffic in China roughly tripled from the final quarter of 2022 to the first quarter of 2023. However, air traffic activities were at ~80% of their 2019 levels last quarter according to Fitch Ratings, indicating there is room for air travel demand to continue rebounding in the short-term which should drive up jet fuel (kerosene) demand and ultimately crude oil demand in China. Additionally, the resumption of vacation and business travel activities (as China opens back up to the world) and greater use of conventional automobiles powered by internal combustion engines (the return of the commute along with the resumption of recreational activities) should help further drive up Chinese crude oil demand.

Longer-Term Considerations

While rising electric vehicle sales pose a headwind to Chinese oil demand growth, the biggest hurdle to China’s longer-term oil demand growth trajectory comes down to demographics (particularly the size of China’s population). For myriad reasons, the country is contending with the prospect that its population could shrink below 1 billion people by 2080 from roughly 1.4 billion currently according to data cited by the Brookings Institution. A smaller population size, keeping energy consumption per capita constant, creates major hurdles for total energy consumption.

However, it’s important to note that Chinese’s energy consumption per capita stood at 109.1 gigajoules per year in 2021 according to BP (it was slightly higher in the special administrative region of Hong Kong) while the average in Europe and North America stood at 122.0 gigajoules and 227.0 gigajoules in North America, respectively. Should China’s population decline, the country could still experience energy consumption growth on an absolute basis should its energy consumption per capita rise to meet North American levels. There are major differences between the Chinese economy and related energy consumption patterns versus European and North American economies, though it's worth noting that Chinese energy consumption on a per capita basis rose by over 33% from 2011 to 2021 according to BP.

Energy consumption per capita is not a perfect apples-to-apples comparison as it concerns oil demand per capita, which has been on the rise in China over the past decade as oil demand growth has clearly outpaced China’s population growth in recent years. According to World Bank data , China’s population stood at ~1.35 billion in 2011, implying 4% population growth from 2011 to 2021 while data from BP indicates daily oil demand in China grew by 60% during this period. However, it's important to keep in mind that rising energy consumption per capita in China remains a major driver for crude oil demand growth going forward, though the longer-term shift from internal combustion engines to electric vehicles means the correlation between crude oil demand growth and energy consumption per capita growth will weaken over time.

Another key factor to consider is energy efficiency, such as more efficient household appliances or lighting systems, which poses a longer-term hurdle for global energy consumption growth on both an absolute and per capita basis. That being said, the decline in energy consumption per capita seen in developed countries (such as the US and Japan) from 2011 to 2021 was relatively modest. Public transportation options are other hurdle to energy consumption growth, though as China is the third largest country in the world in terms of square miles, the need to travel long distances will always be a factor for tourists, households, and businesses in the country.

Concluding Thoughts

The outlook for global energy demand, including crude oil demand, remains favorable as China's economy rebounds from COVID-19 lockdowns. While the proliferation of electric vehicles and the chance that China's population declines meaningfully over the next 75-ish years are major potential hurdles to oil demand growth, in the short- to medium-term the outlook for crude oil demand growth is bright.

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