China Could Surprise The Oil Market

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Daniel Jones

Summary

In this piece, I looked at news from the China National Petroleum Corporation regarding projected oil demand.

Although Chinese data generally cannot be trusted, the company was closer to predicting oil demand for the country last year than the EIA or IEA.

This year, the company expects Chinese oil demand to rise 4.3%, handily outperforming forecasts from other groups.

This looks bullish for oil, especially since the uptick in demand could take a chunk out of the global oil glut if the CNPC is accurate.

A few days ago, the CNPC (the China National Petroleum Corporation), a state-owned oil and gas operator, forecasted that oil demand would come in fairly strong during the 2016 fiscal year. This forecast flies in the face of data provided by two other prominent organizations that see relatively sluggish growth for the nation as it struggles to keep GDP growing at a reasonable pace. Despite my concerns that China's economy is in a questionable state right now, any sort of impressive demand growth for oil would imply that the underlying economy is stable and, more importantly, could have a positive affect on the global oil glut that has been persistently stubborn.

China's oil demand could come in stronger than forecasted

According to the CNPC, oil demand for 2016 should come in at 11.32 million barrels per day. Should this forecast turn out to be accurate, it will mean that oil demand for the year will be 4.3% greater than the 10.86 million barrels per day seen during 2015. This places the nation on track to catch up with the U.S. in terms of demand down the road, though that day is still years away.

To put this growth in perspective, it's important to consider that the IEA (International Energy Agency) has forecasted growth for 2016 of only 3.1%. Using the CNPC's data for 2015, this suggests that demand would come in at 11.20 million barrels per day. Meanwhile, the EIA (Energy Information Administration) pegs demand growth at only 2.9% for the year, with total oil consumption totaling (again, using the CNPC's base data) 11.17 million barrels each day.

When it comes to China, I believe it's fair game for investors to think that the country will tout stronger future performance than what is realistic but this isn't always the case. Last year, the company forecasted that demand growth for the nation in 2015 would come out to just 3%. This was slightly higher than the 2.9% growth the EIA forecasted and was meaningfully higher than the 2.5% increase the IEA estimated for the year. According to the data provided, however, demand growth for the country came out to a rather impressive 4.8%, topping the 3% growth seen in 2014 and smashing the 1.6% uptick reported for 2013.

This does not mean that the CNPC will be correct in forecasting a higher increase this year (its 2014 forecast was too high), but it does suggest that investors have some reason to believe that, absent an economic downturn (something that is entirely possible but which many analysts seem to think won't happen yet), there's a good probability that the data forecasted by the EIA and by the IEA will be wrong on the downside.

What would this do for oil markets?

Nobody can predict supply and demand for oil on a global scale but the EIA currently suspects that supply this year will come in about 740 thousand barrels per day above demand, suggesting that the global oil glut will worsen. As of the time of this writing, I have another piece pending that suggests this may be too bearish and that there's a reasonable chance that we may see some rebalancing this year, followed by a significant rebalance during 2017 unless oil prices rise.

Either way, the impact from stronger growth in China could be very positive for long-oriented oil investors like myself. If, say, the CNPC turns out to be correct regarding future oil demand for the country, oil consumption for 2016 would average somewhere between 120 thousand barrels per day and 150 thousand barrels per day above what the EIA and IEA, respectively, have forecasted. In aggregate, this means that excess consumption would whittle away 43.8 million and 54.75 million barrels over the course of this year. Nobody knows exactly how large this glut is but an estimate of around 500 million barrels seems to be realistic based on the numbers currently available.

Ultimately, what this means is that somewhere between 8.8% and about 11% of the oil glut could be eaten away just from CNPC's forecast being accurate versus what these two other organizations have in mind if I am correct in thinking that the glut will likely start shrinking this year. This may not seem like a great deal of change in the grand scheme of things, but we need to consider that a rising tide lifts all ships. In a scenario where the CNPC's forecast is correct, other Asian countries, as well as Australia, which is a major trading partner of China, should enjoy some benefit and, in turn, see either stronger growth or weaker contraction.

Takeaway

As things progress with the oil market, I'm seeing more and more positive news. It's coming in little bits and pieces but the data does seem to point to a world where the market will soon balance out or at least begin to balance out. This does not mean that oil prices will roar higher to where they were before prices collapsed (that would take much stronger demand and/or a cut from OPEC), but it does seem to indicate the overall trajectory. Though I have my own criticisms regarding China's economy and I believe investors should be cautious relying on what the nation says, data regarding stronger-than-forecasted demand for 2016 should prove bullish moving forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.