Some promising signs of recovery are evident in the latest Chinese oil demand data. Although the data is encouraging, there are significant still significant headwinds to Chinese oil demand growth recovering to previous levels, according to Barclays.Barclays is sticking with the below consensus 120k b/d (1.2%) growth rate for 2015 Chinese oil demand, compared with consensus views of around 280k b/d.

Chinese implied oil demand in October has held above the 10 mb/d mark, for the second month in a row, with October seeing refinery runs boosted to 10.27 mb/d (the highest monthly level on record). The y/y growth rate since August has averaged 4.4%, which is in contrast to the -0.6% seen in the Jan – August period.

In the latest data set, it is the recovery in diesel demand growth that stands out, especially as this part of the barrel (the largest component of Chinese oil demand by product at almost a third) has been the biggest source of weakness in overall demand this year. Diesel demand grew by 5.3% y/y in October, continuing from the 3.8% growth seen in September.

Meanwhile, gasoline demand growth continues to be healthy, having recorded a 11.7% (249 kb/d) y/y growth in year-to-October data. Indeed, there is an improving momentum in the gasoline demand growth rates reflected in the August to October period. In our view, underlying gasoline demand growth is likely to remain strong given recent trends in auto sector sales and ownership. Sales of passenger vehicles (excluding minibuses) rose +10.5% y/y in October (improving from 8% in September).

Among the rest of the barrel, fuel oil demand growth remains weak, as increasing substitution takes place from the tea-pot refineries. While jet fuel demand growth continues at double-digit growth rates, with the year to October y/y gains at 13.9%. This continues to be driven by healthy domestic air traffic, with the IATA data showing an 8.6% y/y growth in overall traffic in the country over September.

Diesel demand growth faces several headwind, Barclays said. The multi-year property market correction reduces diesel demand used in construction activity. A more efficient power sector, also implies less usage of diesel in ad hoc generation facilities, as well as mining activities linked with coal have also reduced.

However, if manufacturing picks up on better export prospects to the US, this would help the complex along with petrochemical demand with some gains. But this would not be able to significantly offset the weakness from the structural changes we mention above, in our view.

A lot then will depend on the strength in gasoline continuing. Here, the Vehicle Inventory Alert Index has risen to 55% from 46%, suggesting some inventory building among dealers needs to be factored in, going into the end of the year and that sales figures will likely fall back.

Furthermore, gasoline demand statistics may be getting boosted by statistical noise, specifically tightening regulation in the blending sector, which is moving more gasoline into the official statistics, but artificially boosting the headline growth rate.
Source: Barclays