China’s Oil Demand Outlook Darkens as OPEC+ Prepares to Meet

(Bloomberg) -- As OPEC+ prepares to review global oil markets, trouble is brewing in the group’s biggest customer.

Chinese oil refiners are cutting processing rates as flagging factory strength and a housing crash crimp demand for plastics and fuels used in construction. The Asian giant is reining in crude purchases from Saudi Arabia and a key grade from Russia. The duo lead the OPEC+ producer coalition, which meets this weekend.

The group has curbed oil supplies to stave off a surplus and shore up prices, and is expected to continue the measures into the second half of the year. But a downturn in Asia’s biggest importer could derail its efforts. 

Crude prices have retreated almost $10 a barrel in the past six weeks, as China’s darkening outlook adds downward pressure to a global market awash with plentiful supplies from the US and elsewhere.

While the pullback offers relief for consumers and central banks grappling with persistent inflation, it threatens revenues for the Saudis and their OPEC+ partners. Riyadh needs prices close to $100 a barrel to fund the ambitious plans of Crown Prince Mohammed bin Salman, the International Monetary Fund estimates.

“At the heart of weakening demand is China,” said Henning Gloystein, head of climate and resources at consultants Eurasia Group. “If these early indicators of an emerging imbalance in China last,” then “OPEC+ would feel pressured to roll over its supply cuts.” 

The Organization of Petroleum Exporting Countries and its allies will convene an online meeting on June 2, where officials expect they will agree to prolong about 2 million barrels a day of output cutbacks. A Chinese slowdown gives the producers all the more incentive to persevere.

After faster-than expected economic growth in the first quarter, China’s strong start to 2024 soon began to fade, illustrating the challenges that confront President Xi Jinping as Beijing’s decades-long boom comes to an end. 

The producer price index — one gauge of factory strength — has remained negative for 19 months. An 11-month consecutive plunge in home sales has crimped consumption of plastics and weakened petrochemical product margins. 

It’s also limited demand for diesel used in outdoor construction, and as a transport fuel to ship industrial materials. According to one metric, Chinese apparent consumption of oil products fell year-on-year in April for the first time since December 2022.

Consequently, refiners are dialing back operations. 

Refining rates fell to 14.36 million barrels a day in April, the slowest pace since December and 4% lower than same time last year, according to Bloomberg calculations based on government data.

Smaller Chinese refiners concentrated in Shandong province — known as teapots — have reduced operating rates to around 55% of capacity, compared with 62% a year ago, according to Mysteel OilChem. Their purchases of a key Russian grade —— ESPO —— have fallen to the lowest in three years, data analytics firm Kpler estimates.

Meanwhile, major state-run plants are reluctant to revive operations after returning from seasonal maintenance, according to consultant Energy Aspects Ltd. Throughput at Chinese refineries will rise by less than 100,000 barrels a day this year, the weakest increase in at least two decades, the company estimates.

There’s been a visible impact in oil flows to the Asian giant. The number of supertankers headed to China fell to the lowest in seven weeks in the most recent tracking data compiled by Bloomberg. One refiner with a long-term contract with Saudi Arabia scaled back purchases for June. 

Bullish oil traders, having been burnt by last year’s surprise 10% price pullback, may remain wary on the commodity if Asia’s growth engine looks shaky.

“Directionally the market will tighten,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. Still, “I have my doubts how much financial length will come back into the market because China looks relatively weak.”

Still, OPEC+ officials privately remain confident about oil demand in China and other parts of Asia. Chinese oil consumption is on track to increase by 510,000 barrels a day this year — accounting for about half the global total — to 17 million barrels a day, and expand further in 2025, according to the International Energy Agency in Paris.

Furthermore, the country’s oil intake may be buoyed as it takes advantage of low prices to replenish reserve stockpiles. China added more than 30 million barrels of crude to inventories in the month to mid-May, the fastest rate in a year, according to consultants Vortexa Ltd. These often comprise shipments from sanctioned nations like Iran, which trade at a discount to regional benchmarks. 

China has been “pretty consistent” since 2008 in its policy to top up reserves when prices are low, said Ed Morse, senior advisor at Hartree Partners. “The basic structure is to build inventory when you can,” he said. 

Nonetheless, it’s ominous for oil producers and bullish investors alike that China’s lull is emblematic of a global market that’s tipping from tightness into oversupply. 

In other parts of Asia, a sharp drop in returns from making diesel is prompting some refiners — such as Taiwan’s Formosa Petrochemical Corp. and another in South Korea — to make modest reductions in operating rates. 

From West African producers Nigeria to Azerbaijan and Kazakhstan, several OPEC+ exporters have struggled to sell cargoes at their usual speed amid competition from US exports, causing prices to weaken, traders say. A rebound in flows from the US Gulf to Europe has put pressure on key North Sea and Mediterranean markets. 

In the US — still the world’s biggest oil consumer — crude inventories at the storage hub in Cushing, Oklahoma, are at the highest levels since July. Gasoline demand, while set for a boost when Americans take to the roads for vacations this summer, remains below the same period last year, implied consumption figures show. 

“The physical market is still very sloppy,” said Brian Leisen, a commodity strategist at RBC Capital Markets LLC. “We find it hard to get more constructive until we see evidence that cargoes are starting to clear.”

©2024 Bloomberg L.P.