China's Oil Demand Uncertain on Mixed Outlook

Apparent oil demand -- net oil product imports plus refinery throughput -- fell to 36.84 million mt or 9 million b/d in June, the lowest level since September last year, according to Platts' calculations last month. This was a 1.9% contraction year on year. Estimates from government data released last week put apparent demand in July at roughly 38.92 million mt or about 9.2 million b/d, up 2.5% year on year.

Although Beijing has implemented a series of liquidity boosting measures, including lowering banks' reserve requirement ratios and cutting interest rates in the last few months, trade and output data for July released last week remained lackluster, casting uncertainty over economic performance.

Beijing-based energy consultancy 3E said in a report on Monday that although it believes the central government's priority will be to boost growth, oil demand in China is likely to move into a "seasonal low" in August, particularly for LPG and fuel oil, which are weather dependent. It expects demand for the major oil products, excluding light chemical feedstock, to total 8.97 million b/d in August, up 3.5% year on year. This is versus an estimated 9.07 million b/d in July, also a 3.5% increase.

3E said consumption of many oil products has been depressed by weakening economic growth and gasoil has been most heavily affected, largely due to slowing operations from heavy industries. Recent inclement weather and typhoons have also dented some economic activity along China's coast, the report said.

It expects gasoil demand to be 3.41 million b/d this month, flat from July and down from June volumes of 3.49 million b/d. Growth this month is also expected to slow to under 2% year on year, versus over 4% at the start of the year.

Janet Kong, head of research at investment bank China International Capital Corp., said she still expects overall oil demand growth to rebound to 2.7% in the fourth quarter from 1.8% in Q3 as the poor macroeconomic data in July would have been a wake-up call to the government that more needs to be done to boost growth. "Data in July was pretty weak and the central bank will likely do more, either through cutting reserve requirement ratios or interest rates."

Victor Shum, managing director at Purvin and Gertz, said: "My view is that we may have observed a turning point in the June and July timeframe, and we're likely to see oil demand pick up, coming on more stimulus measures expected from the government."

He added that the government will be eager to improve economic growth, particularly by November, when China's once-a-decade political transition is scheduled to take place.

WEAK NAPHTHA AND LPGKong said that while gasoil, gasoline and jet/kerosene demand have been consistent with the macroeconomic picture, LPG and naphtha have been weaker than expected.

CICC has reduced its demand forecast for LPG in the second half by 80,000 b/d due to increased substitution from natural gas.

LPG is mainly used as fuel for heating by city residential users and in public transport. It currently makes up under 10% of China's total oil demand. But it is being replaced by cheaper LNG imports. Unlike gasoline, gasoil and kerosene, LPG retail prices are not controlled by the government.

Naphtha demand has been weak this year due to underlying weakness in the chemical and petrochemical sectors. CICC estimates demand fell nearly 5% year on year in the second quarter to 1.6 million b/d. It says a flood of cheap ethylene imports from the Middle East will likely reduce domestic production and continue to dampen naphtha demand.

Shum said fuel oil demand could receive a boost from independent teapot refiners -- which commonly use straight-run fuel oil as feedstock -- which will see their margins improve following the government's latest retail product price hike on August 10, when gasoline prices were raised by Yuan 390/mt and gasoil by Yuan 370/mt, an increase of over 4%.

"If margins improve and economic growth boosts gasoline and gasoil demand, that will encourage teapot refiners to process more fuel oil," he said.