The oil market has been pricing in the weakness of Chinese demand for much of the year. The ‘Asian giant’ is the largest oil importer in the world, so its ‘appetite’ for crude oil is a key factor in determining the price of oil. China’s economy is slowing and at the same time becoming electrified. Experts believe that Beijing could even have already left its ‘peak oil demand’ behind, that is, that China’s demand for crude oil will not increase again (there will be temporary ups and downs) because the electric car and renewable energy generation and nuclear are gaining weight. Despite everything, China continues to consider oil as a strategic and very necessary resource to keep the economy oiled and functioning. An interruption in the supply of crude oil in the Middle East or the US (the world’s largest producer) could dent China’s growth engines. For this reason, Beijing could have been storing oil ‘quietly’ for several months, according to JP Morgan economists.
The American investment bank has published a report this week in which they ask if, “Is China’s demand really that weak? China has reached a historic milestone: its demand for gasoline and diesel could have reached its peak ( peak oil demand) or would be about to, which is leading the country’s oil demand to move at a slower pace, driven only by the expected growth in oil consumption for the petrochemical industry and jet fuel However, there is a nuance in how demand is calculated,” these experts say.
The data managed by giants in the world of raw materials such as Kpler reveal that, in principle, Chinese oil inventories are falling, that is, China is using more oil than it produces and imports, so it has to ‘pull’ the crude oil accumulated for years in its large earth deposits, pipelines and refineries. However, JP Morgan analysts have found that China has not stopped accumulating oil in recent monthsbut it has done so in a relatively opaque way and accumulating the crude oil where no one can see it. China is preparing for what may come, from increased tension in the Middle East to a US president hindering trade with China.
JP Morgan experts model demand for raw materials. This means that JP Morgan carries out a complex calculation of “real demand”which is based on refinery production, net imports, and changes in inventories of refined products. Among these components, the movement of inventories (the oil that accumulates) is the most opaque of all, the American bank assures (the oil can be ‘hidden’).
“After adjusting Chinese refinery yields and crude oil imports to account for opaque imports of Iranian and Venezuelan crude entering China as fuel oil and blended bitumen, we estimate that so far this year, China’s processing rates “They averaged 15.3 million barrels per day (mbd), almost 300,000 barrels less than the 15.6 million average in 2023.” In these data, it must be taken into account that China produces more than 4 million barrels of crude oil every day, an amount that is entirely consumed domestically.
So the weakness in refinery performance contrasts with the surplus of crude oil available for processing. China’s crude oil imports fell to 11.4 mbd during the first nine months of the year, 300,000 barrels less than the 11.7 mbd average in 2023. However, domestic production slightly exceeded last year’s volumes, rising to 4.2 mbd. This is where everything is key. JP Morgan’s accounts reveal: “Combining domestic production with imports results in a total of 15.6 mbd available for processing (only 15.3 mbd is being refined), leaving a surplus of almost 300,000 barrels every day.”
Why does China accumulate and hide oil?
“First, it appears that China is aiming to create an inventory buffer, possibly as a precaution against a possible disruption in crude oil shipments due to rising tension in the Middle East or possible restrictions generated by a future US administration,” notes the JP Morgan report. Fear of a major conflict in the Middle East or a Trump victory is leading China to be very conservative with crude oil.
“Secondly, these crude oil reserves appear to be stored in underground deposits, invisible to Kpler satellites, which only track surface storage”. Here, JP Morgan solves the other unknown in the equation. Kpler is failing because it can only make calculations with oil on land (it is calculated based on the height of the lids of large crude oil tanks – the higher they are, the more crude they have – and the oil tankers loaded in Chinese waters), but it cannot can calculate how much crude oil China stores in caves and under the ground, something that seems strange, but is quite common in the world of raw materials (many countries have large caves to store oil. Firstly because it is a place safe and second because in such a fragmented world it is better that your ‘enemy’ does not know your cards.
“Third, Chinese demand for crude oil could be underestimated by about 300,000 barrels per day, given our belief that, when it comes to raw material inventories, what goes into China stays in China,” they say from JP Morgan.
The latest report published by the International Energy Agency (IEA) revealed that public inventories in developed countries exceed 1.2 billion barrels. Furthermore, “China has another 1.1 billion barrels of crude oil reserves, enough to cover 75 days of domestic refinery operation at the current rate. For now, supply is still flowing and, barring a major disruption, the market faces a considerable surplus in the new year,” noted the document published two weeks ago. China has a lot of oil publicly and officially, but it could have much more if underground oil is accounted for.
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