IIFL believes China's oil demand is overrated

China's oil demand and growth may be making headlines, but the world's fifth-largest crude oil producer is undergoing decelerating growth in oil consumption and is more a price taker than a price driver, says a new report. China's oil consumption growth rate has fallen over the recent years, a report by IIFL on China's quest for energy security said. Growth averaged 4.8 % per annum in the past 30 years since China's reform and opening, and is dwarfed by India's 5.3 % demand surge during the period.

"Only 19 % of China's energy needs are met by oil and the country's oil dependence is weakening. We expect sharply lower consumption growth (0.9 % in 2009, 1.3 % in 2010 and 1.2 % in 2011) due to economic rebalancing and efficiency improvements," it said.

In any case, China and India cannot make up for the sliding oil consumption in the developed world.
"A 1 % decline in OECD counties oil consumption would require 6 % growth in China to compensate for it," it said. The International Energy Agency's (IEA) mid-year report forecasted a 5.1 % decline in OECD's consumption in 2009, in which case oil consumption needs to grow by an impossible 22 % in China and India.

IIFL, the institutional equities arm of India Infoline, said China's oil demand had been moderated by its quest for energy security and efficiency improvement.
"There has been a structural shift towards other energy sources, and the government is redoubling its policy efforts to reduce energy intensity." China's growth, combined with Indian demand, provided "no meaningful support to the slumping demand in the developed world," it said adding China's real oil consumption growth was likely to fall from nearly 5 % in 2007 to below 2 % in the next two years.

"As against dramatic production decline in the developed world, China has maintained a respectable 2 % plus (annualized) growth rate in domestic crude production over the last five years," the study said.
"Domestic production supplies half of is crude oil demand -- a far higher self-sufficiency rate than other major economies."

Despite maturation of major producing assets such as Daqing and Shengli, China's powerful national oil companies have been able to sustain stable production through enhanced recovery technologies and development of new properties in western China and the Bohai Bay region. State-run PetroChina and China Petroleum and Chemical Corp (Sinopec) typically spend 20-30 % of their total R&D expenditures on exploration -- far higher than western oil majors' average of 18 %.
"The importance of China's oil consumption and growth to global trade, albeit undoubtedly significant, has been grossly overrated," IIFL said. "China still imports much less oil than the developed world does -- China is a price-taker, not yet a price-driver."

"Appearances can be deceptive, especially when it comes to China or oil. Beneath the everyday 'China demand' talk, is decelerating growth in oil consumption, facilitated by a structural shift in the economy and government policies," it said.
However, China's oil imports may jump in 2010 as it starts filling up the 170 mm barrels second phase of its Strategic Petroleum Reserves. Price reforms in China have greatly improved industry economies, which was plagued by refining loss, caused by stringent price control and high crude oil prices. Downstream players are enjoying healthy margins as refined petroleum pries are kept close to historical high.