Reduced appetite for crude oil was seen in Asia's largest consumers of Crude Oil-China and Japan.Barclays said in a report that they consumed 1.6% less oil year-on-year basis in July. In the year to August, implied oil demand in China was flat year-on-year, down by 14 kb/day- the slowest pace of Chinese growth since 1990.

Diesel demand was weak due to slowdown in construction sector, slow down in domestic coal mining has reduced demand from ancillary activities. Over the rest of the year, a turnaround in Chinese diesel demand is looking unlikely given that underlying weak economic trends remain in place (along with the property market correction).

"We expect gasoline demand growth to remain strong, with statistical adjustments possibly leading to a further robust reading over the next six months. This is because the government is tightening rules on sales of blended volumes, which would allow more of the unofficial sales to be recorded in the gasoline consumption data," Barclays report said.

"Overall, we do not expect any significant improvement in prospects for Chinese oil demand growth over Q4. However, we expect Chinese imports, which averaged growth of 8.5% in the year to August (despite domestic demand being flat), to continue the momentum, on further commercial and strategic stockpiling. According to Argus estimates, commercial inventory capacity is currently at 343 mb and, despite the builds over the course of this year, commercial inventory levels are at only 259 mb. Further volumes of crude imports dedicated to SPR filling are also likely in Q4."

Japanese demand was weak due to reduced usage in power sector and weakness in gasoline demand amid weaker than usual summer driving season ( July to September).

Industrial activity indicators in Japan look fragile, with September Markit/JMMA PMI falling to a seasonally adjusted 51.7 from a final reading of 52.2 in August. "Looking ahead, our economists expect lower GDP growth of 2.8% in Q4, from 3.7% in Q3. And with the weakening yen reducing refiners’ purchasing power for crude, refinery runs are unlikely to pick up strongly. We also expect cheaper coal and other energy alternatives to continue replacing
oil in the power sector."

Overall, a significant recovery of demand growth in the Pacific is looking even harder to achieve given that its two heavyweight consumers face headwinds. This suggests to us that for oil markets to balance, adjustments will have to be mainly on the supply side, Barclays said.
Source: Barclays