With crude oil inventories having started the year at relatively high levels and China having built inventory at its Strategic Petroleum Reserve, refiners have gradually de-stocked throughout the year, with inventories more around historical average levels, said Barclays in a report. Sinopec’s recent management update highlighted that the driving season in China (particularly over the summer period and the Golden Week in October) as well as auto sales have partly supported gasoline demand, offset by weaker demand for diesel owing to lower power demand.
“However, we would expect diesel demand to show a typical seasonal improvement throughout the fourth quarter and into 2013, as well as a continued recovery from truck activity.” Barclays noted.
Chinese oil demand
Chinese oil demand is likely to have grown by only c200kb/d in 2012, relative to its 10-year historical average growth of c500kb/d.
However, Barclays forecasts an improvement in Chinese oil demand growth to 300kb/d in 2013, with signs that certain oil-consuming sectors may have bottomed or may be recovering, such as transportation.
“We see the worst of the slowdown in Chinese oil and chemicals demand as behind us, with 2Q12 possibly marking the profitability inflection point for the Chinese energy industry. After a year of de-stocking in the country, inventory overhang risks have diminished.” the Bank said in a report.
There are signs of an improvement in activity for some sectors such as transportation, with strong gasoline demand growth and a seasonal uptick in diesel demand from power consumption expected this winter.
These factors, together with a sharp rise in new refining capacity in the country from 4Q12 onwards (>1mbl/d), mean we expect the incremental oil demand picture to improve into 2013.
An improvement in Chinese oil and chemicals demand is supportive for PetroChina (OW, PT HK$13), Honam (OW, PT W363,000), LG Chem (OW, PT W421,000) and Dongyue Group (OW, PT HK$4.9), in our opinion.
A common trend for China oil companies over the 3Q reporting season has been management updates highlighting a stabilisation and/or recovery in demand for oil products and some chemical products.
“We do not dispute that China’s aim to moderate economic growth this decade may not see the country return to the historical average growth rates for oil and chemicals demand, or continue to impact fuel price policy. However, we believe there is increasing evidence that the summer period this year may have been the bottom for demand.” the Bank added.
Braclays in fact sees a sharp rise in refining additions from 4Q12 with over 1mb/d of new capacity coming onstream and only slightly less in 2013. Much of the new refinery capacity is coastal and likely to ramp up relatively quickly, especially if the government partly reforms fuel pricing.
This is supportive of incremental oil demand and, with the current inventory position together with seasonal impacts into the Chinese New Year period, we expect oil imports to rise in the coming months.
Source: Barclays Research