The oil market has factored in weak Chinese demand for much of the year. The “Asian giant” is the world’s largest oil importer, so its “appetite” for crude oil is a key factor in determining the price of oil. The Chinese economy is slowing down and electrifying at the same time. Experts believe that Beijing may even have already passed its “peak oil demand”, that is, Chinese demand for crude oil will no longer increase (there will be temporary ups and downs) because the electric cars, renewable energy production and nuclear power are gaining weight. Despite everything, China continues to consider oil as a strategic resource essential to the proper functioning of its economy. A disruption in crude oil supplies to the Middle East or the United States (the world’s largest producer) could harm China’s growth engines. This is why Beijing could have “quietly” stockpiled oil for several months, according to JP Morgan economists.
The US investment bank released a report this week asking whether “is Chinese demand really that weak?” China has reached a historic milestone: its demand for gasoline and diesel could have reached its peak (peak oil demand) or would be causing a slower evolution of the country’s oil demand, driven solely by expected growth of oil consumption for the petrochemical industry and jet fuel. However, there is a nuance in the way demand is calculated,” these experts say.
Data managed by commodity giants like Kpler reveals that, in principle, Chinese oil stocks are declining, meaning China is using more oil than it produces and regardless, it must therefore “remove” the crude oil. accumulated for years in its vast land deposits, pipelines and refineries. However, JP Morgan analysts find that China has continued to hoard oil in recent monthsbut it has done so in a relatively opaque manner and by accumulating the crude oil where no one can see it. China is bracing for what could happen, from increased tension in the Middle East to a U.S. president hindering trade with China.
JP Morgan experts model the demand for raw materials. This means that JP Morgan performs a complex calculation of “real demand”which is based on refinery production, net imports and changes in refined product inventories. Among these components, the movement of stocks (the oil which accumulates) is the most opaque of all, assures the American bank (the oil can be “hidden”).
“After adjusting Chinese refinery yields and crude oil imports to account for opaque imports of Iranian and Venezuelan crude entering China as fuel oil and blended bitumen, we estimate that so far this year, rates China’s processing capacity averaged 15.3 million barrels per day (mbd), almost 300,000 barrels less than the average of 15.6 million in 2023.” In this data, one must take into account the means that China produces more than 4 million barrels of crude oil every day, an amount entirely consumed domestically.
Thus, the weak performance of refineries contrasts with the surplus of crude oil available for processing. China’s crude oil imports fell to 11.4 mbd in the first nine months of the year, 300,000 barrels below the 2023 average of 11.7 mbd. However, domestic production slightly exceeded the volumes last year, amounting to 4.2 mbd. This is where everything is essential. JP Morgan’s accounts reveal: “Combining domestic production and imports gives a total of 15.6 mbd available for processing (only 15.3 mbd is refined), leaving a surplus of almost 300,000 barrels each day. »
Why is China hoarding and hiding oil?
“First, it appears that China is seeking to create a buffer stockpile, possibly as a precaution against possible disruption to crude oil shipments due to rising tensions in the Middle East or possible restrictions generated by a future administration American”, notes the JP Morgan firm. report. Fear of a major conflict in the Middle East or a Trump victory is leading China to be very conservative when it comes to crude oil.
“Second, these crude oil reserves appear to be stored in underground deposits, invisible to Kpler satellites, which only track surface storage”. Here, JP Morgan solves the other unknown in the equation. Kpler fails because it can only do calculations with onshore oil (it is calculated based on the height of the lids of large crude oil tanks – the higher they are, the more crude they have – and the tankers loaded into the Chinese waters), but it can’t calculate how much crude oil China stores in caves and underground, which seems strange, but is quite common in the commodities world (many countries have large caves for store oil first because it is a safe place and second because in such a fragmented world it is better that your “enemy” does not know your cards.
“Third, Chinese demand for crude oil may be underestimated by around 300,000 barrels per day, given our belief that when it comes to raw material inventories, what comes into China stays in China,” say -they at JP Morgan.
The latest report published by the International Energy Agency (IEA) reveals that public stocks in developed countries exceed 1.2 billion barrels. Additionally, “China has additional reserves of 1.1 billion barrels of crude oil, enough to cover 75 days of operating its domestic refinery at the current rate. For now, supply continues to flow and, barring any major disruption, the market faces a considerable surplus in the new year,” noted the document released two weeks ago. China publicly and officially owns a lot of oil , but it could have much more if underground oil was taken into account.
