Rising Chinese Demand For Oil: Good But Not Great

| About: The United (USO)

Summary

With Chinese Trade figures having shown increased demand for oil imports, traders are trying to comprehend what this may mean for the price of oil.

Chinese oil demand is a significant part of global demand; whether it is strengthening will have a big effect on oil prices.

In this article, I explain why I think this is certainly good news, but not the bullish green flag some may hope.

The Chinese economy is an important catalyst for oil (NYSEARCA:USO) demand. Despite its "emerging market" status, China creates more than 16% of the world's GDP. On top of this, China is also one of the top worldwide importers of oil. So, fears that Chinese economic growth may be slowing have been worrisome to oil bulls.

Some of this fear was assuaged on Wednesday when Chinese released import figures, showing that oil imports had actually increased 13% from the same period last year. This jump was the result of refiners profiting from a Chinese law that freezes retail fuel prices when oil is below $40 a barrel.

This boost in demand was a plus for oil markets, but even more encouraging was the overall trade numbers which showed exports and imports increasing. This could be a sign that the Chinese economy is no longer slowing, which it appeared to be in at the end of 2015.

This is not an isolated incident. In March, China released producer price inflation numbers which showed that deflation had slowed. The property sector and fixed-income investment has also shown signs of recovery.

The big question, then, is whether or not the recovery will continue. A growing Chinese economy is a strong positive for oil prices, but significant global headwinds remain. Strong real estate and investment indicators signal that the Chinese consumer is strengthening, which has led to much of the increase in demand for oil. Pressures remain on wages and employment, though. Compounding all of this is a weakening Yuan leading to higher costs for imported goods, of which oil is certainly one.

With China trying to transition to a consumer-driven economy, these negatives are especially dangerous. If the labor market begins to stagnate, this will basically be the end for consumer-driven demand growth for imports such as oil. This demand increase is not necessarily sustainable.

Chinese labor is still dependent on exports. Whether or not these exports remain strong is more a matter of global economic growth than Chinese health, and if global economic conditions worsen, Chinese labor will be sure to feel the pain. China's two biggest importers, the U.S. and the European Union will determine whether or not China can continue to grow its oil demand.

The U.S. has been showing signs that it is growing slower than expected, with possible rate hikes being pushed farther and farther back, and the European Union has been mired with problems with debt and deflation. Neither should be bet on for continued growth.

China will have to depend on other countries for import growth. With many of these countries being oil-exporters, the price of oil will significantly affect their health. So, rising oil prices will be good for Chinese exports.

Of course, this doesn't mean increased demand for oil imports. Even if consumer demand does continue to increase, the retail fuel price freeze is taken away when oil reaches $40 per barrel. So, even though consumer demand should increase as the price of oil rises, this will be cancelled out by the rising price of oil. While rising demand from China is good, it shouldn't be expected to cause a large upward push on oil prices as the rising price could cancel out the increased consumer demand.

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.