The big question mark over the crude oil rally


  • Despite concerns, Chinese demand has been significant in 2017, helping oil prices greatly
  • Beyond the 'OPEC supply cuts' narrative, data shows rising US shale oil supply
  • With future growth rate in China looking doubtful and growing US supply, caution is warranted

The recent rally in crude oil has put concerns regarding China’s appetite for the commodity to rest. According to Chinese customs data, the country imported 281.1 million metric tons of crude oil in the first 8 months of the year, representing 8.44m barrels per day (bpd). Relative to last year, this represents an increase of 950k barrels per day. Thus year-to-date oil demand in China has grown by 12.3%, a stunning increase over 2016. Looking at the global oil demand outlook, the International Energy Agency has forecast that for oil demand will rise by 1.6m bpd in 2017. If Chinese demand continues at its current trend, then demand from the country will represent 60% of the total growth in marginal crude oil demand in 2017. As oil prices are driven by marginal changes in demand and supply, Chinese demand has been an absolutely critical factor (if not the most important factor) for supporting oil prices this year.


Supply and oil stocks

Oil market commentary this year has been largely focused on supply cuts and stocks – starting with OPEC’s decision to extend cuts in May. Following OPEC’s announcement on May 25, crude oil prices have not moved noticeably higher. In fact, prices fell sharply following the announcement, and have since traded sideways.

Oil stocks have also helped prices, with the IEA’s Neil Atkinson stating that “there are lots of indicators on the dashboard which point to the fact that stocks are falling”, referring to falling oil stocks in the US and lower supply. Crude oil’s move higher in September was largely due to the anticipated impact from Hurricane Harvey, whereby refinery closures would have led to lower crude oil supply. While the impact was substantial, refineries in Texas and Louisiana have managed to stage a quick comeback, with refining capacity now returning to normal levels.

Despite the market’s focus on supply and inventories, we would argue that the true driver for oil in 2017 has been demand. Crude oil remains deeply oversupplied, with US shale oil now acting as the global swing producer. The implications from the US’ entry in the global oil market can also be seen in the latest Chinese customs data.


US oil exports: OPEC’s worst nightmare

Following the Saudi-championed OPEC supply cuts, Chinese customs data shows that the country’s mix of oil suppliers has shifted significantly. Specifically, Saudi Arabia has fallen to China’s third-largest supplier, after being in first place in 2016. The country supplied China with 1.03m bpd in 2017, with Russia and Angola both supplying more crude in the first eight months of the year.

Saudi Arabia’s fall shows the steep price being paid by the Kingdom, and other OPEC members, for its supply cuts. One of the largest gainers in 2017 was Brazil, with oil exports to China rising 41.8% to 480k bpd. The other standout is OPEC’s ultimate nemesis: the United States. US oil exports to China have been stunning, with growth of 1,000% in 2017. China imported an average of 128k bpd from the US in 2017. Despite OPEC’s supply cuts, the country has had no problem sourcing oil from non-OPEC sellers.  


Looking ahead: US exports in Asia and moderating Chinese demand

With US crude exports now entering Asia in 2017, OPEC is gradually losing control of the supply narrative. This can be seen in Chinese data, as well as data from other significant energy buyers. Looking at demand, Chinese growth is set to moderate in the latter half of 2017 based on leading indicators by China Beige Book. Unlike 2016’s credit-driven impulse, Chinese credit growth has been far more subdued in 2017. As new debt falls in rate-of-change terms, new year-on-year demand for oil is likely to fall correspondingly. Thus the country’s 10%+ growth in oil demand is unlikely to maintain its current trajectory into 2018.

With the 'OPEC supply cut' narrative under attack from US shale and a weaker outlook for Chinese demand, we would advise some caution given today’s bullish sentiment towards crude oil.

Topics: Crude oil