California Consumes More Oil Than China: Fact or Market Manipulation?

| About: HSBC Holdings (HSBC)

In this clip and article dated Nov. 17, CNBC's Sharon Epperson quoted an analyst's note from HSBC (HBC) pointing out that California currently consumes more crude oil than China.

I do not have a copy of the HSBC report, and therefore cannot verify how the conclusion was reached; however, it is hard for me to fathom California even belongs in the same sentence with China on any economic measures.

Fortunately, since crude oil is probably the most widely traded commodity in the world, its relatively better transparency could quickly shed some light as to this finding from HSBC.

Fact: CA Oil Consumption is 23% of China’s

A search of the statistics from the U.S. Energy Information Administration (EIA) shows that the top three oil-consuming countries in 2009 were: United States, 18.7 million barrels per day (bpd); China, 8.12 million bpd (that’s around three billion barrels per year); and Japan, 4.4 million bpd.

As for California, EIA's latest data shows consumption of 682.6 million barrels a year as of 2008, or around 1.9 million bpd -- 23% of China’s 8.12 million bpd consumption. However, the consumption rate of California has probably dropped way below the 2008 level, since it is one of the hardest recession-hit states in the U.S.

GDP & Population: Not Even Close

Another way to assess the possibility that the claim could be true (assuming HSBC has more resources than the U.S. government) is to look at the macroeconomic measure.

Though oil consumption is a function of many market and economic factors, the size of the economy (GDP) and population are two pretty good indicators.

It is true that California's economy is the largest of any state in the U.S., and ranks eighth in the world. According to U.S. Department of Commerce estimates, California’s GDP (gross domestic product) was nearly $1.85 trillion in 2008 -- a number should be considerably lower now.

China, on the other hand, boasting a GDP of $4.9 trillion in 2009 (that’s three times California, by the way), has recently leaped ahead of Japan, becoming the second-largest economy in the world, trailing only the United States.

Population-wise, with just over 1.3 billion people, China is the world's most populous country, whereas California’s population is around 37 million -- less than 3% of China’s.

China Matters A Great Deal in Crude

Now let's take a look at China's oil-demand outlook. Contrary to the HSBC's implication, according to a Platts analysis, Chinese crude demand in September rose 5.1% year-on-year to an average of 8.68 million bpd. An IEA report earlier in October also indicated that Chinese oil demand surged by 8.5% in August on a 12-month basis.

That suggests the much-fretted tightening by Beijing to fight off inflation most likely will contribute to a couple percentage points' reduction, at the most, in oil demand growth: The 5-6% range instead of 7-8 percent. Beijing is also expanding its strategic reserves on almost every commodity, crude oil in particular, which could be counted as "inelastic demand."

Needless to say, China's energy and oil consumption is only trending up, and will be a major price driver for oil in the foreseeable future.

California Dreaming

This could be hard to take for some people, but could California, with one third of the GDP and 3% of the population of China, one day consume more oil than China? As the old adage goes, “Never say never.” The best answer would be "highly unlikely with extremely low probability."

Fact or Market Manipulation?

Based on the discussion so far, the HSBC statement seems to defy many indicators, as well as known statistics. Why would HSBC issue such a report to the investment community? One can only speculate that it’s probably a maneuver to manipulate the market (pending review of the supporting data, if any, to HSBC's conclusion).

Due to the massive liquidity unleashed by the continuing global quantitative easing, banks and markets are flush with cash and playing big in both stocks and commodities. And truth be told, China’s growth is the only exciting news driving up the markets these days.

As such, it is easy for large institutions and funds to use “China” to pump their positions, short or long. Since Epperson covers the NYMEX floor for CNBC, this bearish information on crude oil from HSBC mostly likely was spreading across the trading pit.

And quite coincidentally, a considerable liquidation of the crude long positions took place after CNBC and HSBC revealed the “China vs. California” note -- which may have had a positive effect on HSBC’s end-of-year quarter.

Traders' Market

Right now, the Fed's QE2 most likely has added at least $10 to crude prices, and funds flow along the way could probably control $100 crude oil price movement, up and down; remember the drop from $140 to $40 per barrel in six months during 2008 to 2009?

So, moral of the story: Since the U.S. is still the largest oil-consuming country in the world while Cushing is brimming with with one of the highest inventory levels on record ((359.7 million barrels as of Nov. 26, or about 20 days of domestic usage. Again, I'm not sure how the CNBC article (see link above) said that the U.S. has half a year worth of crude). Then, on top of that, there's so much liquidity around that market fundamentals will likely take a back seat while traders run the show in the crude market, at least in the near term.

And by the way: Crude oil just jumped about $8 in the past week -- on very little fundamental change -- to close on Thursday above $87 a barrel on NYMEX, while Brent crude even topped $90 a barrel, flipping into backwardation, where near-month deliveries cost more than later shipments (Bear in mind, unlike WTI in the U.S., Brent crude and Europe do not issue weekly oil inventory reports.)