China's Oil Demand in Perspective

My Grandmother used to always say “Not for all the tea in China.” As China is where English people get their tea. Now oil is trading up again based on “Chinese demand!”. Yes China is a big, rapidly expanding country with a billion people and their consumption of oil is going to go up 10% next year. A Billion people! 10%! "Oh my gosh!" you say, "We must buy oil stocks before it’s too late!"

Nonsense!

America is, as we know, an energy hog. Our 300 million people suck up 22 million barrels of crude a day, with only 9 million barrels that we produce ourselves. How much oil do China’s 1 billion people burn up in an average day? Just 7 million barrels total!

In fact China imported just 785 million barrels of oil so far this year. You see all the shocking reports that their import demand will grow 10% next year – that’s 90 million barrels, just 2% of the US’s 4.75 billion barrels imported annually. Those demand figures include China’s move to fill up their own SPR, which will have 100M barrels when it is completed in 2008. They can perhaps impact global demand by 1-2 million barrels a week if they fill it as fast as they can. Since August, they have actually placed just 3 million barrels in the reserve because, unlike our leaders, China does not wish to impact prices.

Yet the oil bulls will have you believe there is a dragon on the other end of the earth drinking up the world’s oil. This is simply not true! It is just another part of the Fear Factor that is being used to keep buying energy stocks and crude oil despite mountains of evidence that there is a global production glut of oil.

Even Boon Pickens says his new high target for crude is $70, of the $50-70 range, and he’s one of the world’s greatest oil pumpers. Since his target was $100 when oil was $70, if he's lowered his target by $30 when oil is $58 - look out below!

With costs rising and demand falling, a drop in the actual price of crude is the trifecta of doom for integrated oil profits.

Today we had a crude surplus of 2.6 million barrels for the week, very interesting with BP’s (BP) Alaska pipeline running just 40,000 barrels/day out of its usual 450,000 barrels/day capacity due to a power outage. In addition to the capacity build (assuming BP ever turns this thing back on) the IEA has lowered global demand forecasts by another 95,000 barrels a day, the third cut this year. How much is too much and when does supply and demand ever kick in?

If you ever wonder why oil trades down every night and up only in the US markets - aside from the manipulation that takes place in the US, it's because traders in other parts of the world take the time to read the papers.

In New Zealand’s papers, you would have read about how traders in Singapore have so much surplus gas (100,000 tons) that they now have to ship it all the way down to South Africa at a cost of $1.3 million per 30,000-ton tanker:

“The Asian gas oil market has been suffering from a supply glut due to soft regional demand. But the market has been supported by Hin Leong's buying spree. The trader has purchased about 14 million barrels of gas oil since June.”

In Singapore, they know their manipulators by name!

You may have read that oil was $55.12 a barrel in Russia on Wednesday, before the US led rally salvaged crude from slipping into the $54s. There is, in fact so much crude that tankers are now being used to store oil by speculators as falling demand has dropped rates to $77,000 a day, pretty cheap for 500,000 barrels! Still if prices don’t go up soon a lot of speculators are sitting on a lot of unwanted tankers full of oil…

There’s an interesting spin on Iran, they may use oil to bribe the Russians and the Chinese with 26Bn barrels of oil in exchange for voting against sanctions in the UN. Opening the Azadegan field to foreign drillers would add over 1Mbd to global production.

In addition to all the oil that is currently being overproduced, there are billions of barrels of fuel soon to be coming on line. Concerns in the US are that there will soon be an ethanol glut, as our current 5 billion gallon annual supply will double by 2010 – with just the already scheduled projects! A barrel of oil makes 19 gallons of gas so 5 billion gallons of ethanol replace 263 million barrels of imported crude – that’s 4 million barrels a week of distillate build!

Regular crude production is up too. According to BHI, worldwide rig count is up 10% over last year with much of that increase coming from US drillers who are reopening old wells that may not have been profitable at $19/barrel but have become bonanzas at $60/barrel.

If those rigs come on-line with just half the world's average production capacity (total 89 million barrels/day), they could add 4.5 million barrels/day by early 2007! Now do you see why the markets are rallying around the globe?

Once those spigots are turned on, they don’t shut down again until oil goes below $30 (and that’s just looking at the build in rigs through September). In 1981, the last time oil went “through the roof” there were 3,969 active rigs in the US. As oil prices plunged during the Clinton administration, many of these rigs were shut down to a low of just 622 in 1999 as they couldn’t compete with $20 oil.

During the Bush administration, as oil prices have climbed from $30 to $60 (yes, I’m being generous) US drillers, many of whom happen to be contributors and “close personal friends” have had a bonanza as they reopened 1,002 well sites in the past 6 years.
On a global scale, we are still 2,600 sites from our 1981 high (ah, the Reagan years!) and even the conservative EIA estimates that 1,500 of these sites can be profitably drilled at $40 a barrel.

Canada opened 96 new rigs just last week and we kicked in with 76 new sites. If they add just 1,000 barrels/day each (very low), last week's new wells would add 172,000 barrels of daily production.

There would be a lot more production on-line now but for the very bad experience we did have in the 80’s as those extra 4,000 active rigs quickly became unprofitable and wiped out the city of Houston. One of the companies that was wiped out at the time was George Bush’s aptly named Arbusto Energy, but don’t worry – Bush sold his shares a week before the company went bankrupt and the SEC said everything was just fine!

With alternate energy, Canadian oil sands, deepwater drilling and shale oil all coming on-line in the next few years, supply is expected to outstrip demand by 4-8M barrels a day by 2010, that will take a heck of a production cut from OPEC to maintain prices!

So who is still buying energy stocks at or near historic highs, up 100% on the average over the past 24 months? As of last week, no one, but for the past 2 days the oil sector has been bid up – even as crude trades down to 52 week lows.

Should you buy it? As my Grandma would say: “Not for all the tea in China!”

But don’t worry oil bulls - all is not lost! We had a glut of oil last year and you were saved by two of the worst storms of the century – perhaps you’ll luck out and we’ll have another catastrophe that kills thousands of people (but not so many as to decrease demand)!

Comments

[Eric Balkan:]

Phil, where does that 10% come from? Sept imports are up 24% vs last year. And at least some analysts are saying this rate will increase. Marc Faber, for instance, says that, with cars now available for $3700 in China, vs $20K a few years ago, there are now 50 million Chinese who can afford a car vs the 1 million back then. (Though he didn't say when "then" was.)

2006 Oct 13 09:29 AM

[huangjin:]

Back then is less than 5 years ago.

2006 Oct 13 09:53 AM

[Philip Davis:]

The accurate figure for demand came from the 10/11 Forbes article linked above. Actually, total Chinese demand is now expected to be 7.43Mbd, up from 7.04Mbd in 2006. Our weekly oil surplus of 2Mb is more than the projected increase in Chinese demand.

As to the cars - affording a car and affording gas are two very different things. This is just another element of demand destruction as the 50M people who can afford $3.700 cars may never become consumers if it's going to cost them $40 to fill up a tank!

You can afford a $30,000 car - if gas cost you $1,000 a month you might think twice about it right?

2006 Oct 14 08:10 AM

[C. Hendry:]

I'd really like to get some information on options, not conspiracy theory about why oil goes up and down. Give it a rest.

2006 Oct 13 02:00 PM

[John Gather:]

Phil, thanks for your informed articles on this site. Clearly you are a bear on oil price. I wonder if you would like to write a ´bull case´ article on oil, based on the best arguments you have found among the bullish oil investors.

One argument that is always repeated is that it is not the oil, but the refining capacities which are stretched thin. Too many years of low investing in the area, accompanied by world wide strong and rising demand, keeps a small cushion of 2% or so only. So any disruption in production can lead to shortages.

But CRUDE is not exactly a refined product, so this particular argument would not explain the high oil price, with such tremendous inventories....

Clearly, if I had CRUDE to sell, I would have shipped the hell out of it, and so the tankers of the world must be full, headed to the big consumers of oil. This and the existing large inventories must eventually bring the price of crude down.

Well, pls write on the bullish case, put on a bull mask and try your best. Would be fun, I am sure!

Best, John

2006 Oct 13 03:30 PM

[Ray Lopez:]

I agree that you can easily write a "bull" case for oil as easily as a "bear" case. I've heard that a 2% difference in supply/demand will swing prices radically on the oil spot market, so China's 2% of the USA increase as pointed out in the article is, by spot oil standards, quite large.

2006 Oct 14 04:37 AM

[Philip Davis:]

Bull case on oil?

Google lists 22,700,000 articles on "Peak Oil" and 33,100,000 articles on the "Oil Crisis" - I have little to add there...

Here's an interesting article that doesn't get enough coverage:
www.washtimes.com/comm...

The refinery issue really cracks me up as it is physically impossible for us to consume more oil than we do now so all this nonsense about US demand completely ignores the fact that we simply can't refine more oil!

Check out my Weekend Wrap-Up at philstocks.blogspot.co... where we address the supply and demand issue.

2006 Oct 14 08:17 AM

[Sidney Will...:]

Phil, Phil, Phil...no one buys the conspiracy theory except folks like Senator Clinton.
And don't drag Boon Pickens in on your hair brained conspiracy stuff...it just does not happen that way. The chinese are and the indians are sucking up the supplies faster than we can find it. Yes we have more wells but the production is still going south. We could double the number of rigs, but unless we hit an unexpected bonanza field we are unlikely to reverse the trend but it would help if we drilled all of Alaska, and much of the Rockies, and off every coast as we slowly transition to another alternative energy. But there again I am a part of the vast right wing conspiracy.

2006 Oct 14 10:05 PM

[Eric Balkan:]

Seem like we should be able to keep fact-free political opinions out of this discussion. There's an open question as to whether or not oil reserves can expand sufficiently to meet Asian needs. I've seen different numbers in this regard....

In regards to refinining oil, I'm not sure where the "can't refine more oil" idea came from. According to industry sources, US refiners are at 93% capacity, which is not 100%. Also, that includes oil we're refining and shipping to Europe. Which brings up the point: refiners no longer have to be co-located with their users. The shipping industry has built and is currently building "product" tankers that can ship refined oil products anywhere.

- Eric Balkan
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2006 Oct 15 01:01 PM

[User 160505:]

A Columbian coworker of mine who barely speaks English states it's all Bush's fault. What would you say to those who are stuck on "Blame Bush For Everything" wagon.

2008 Mar 05 01:24 PM

[Philip Davis:]

I would have to say they are correct!

8-)

2008 Mar 05 05:09 PM

[C. October:]

I find your homework on this subject adequate for a short-term recommendation I do understand you viewpoint. Long term your implications will change as there will be massive demand for this commodity as China and India continue to improve their economic agenda. Nice try being a contrarian but this argument is about two decades late. I agree that manipulation played a significant part this summer, but long term it will be an insatiable hunger deployed by this culture that will keep consumers buying those gas guzzlers. We have not matured enough as an economy as we are not net savers we are net spenders and when we can we will drive up the price of oil.

2008 Nov 15 06:50 PM