The China factor card has been playing heavily in the markets these couple of months. Is China growing or stagnating, seems to be the million dollar question. Will the world’s second biggest economy continue to be a factor in the market?
The remarkable growth of oil demand, and indeed the world economy, since year 2000 can be summed up in a single word: China. A country of nearly 1.4 billion people, the rapid development of China in manufacturing and industry has made it the factory to the world and the fastest growing middle class as well. Flushed with wealth, the Chinese have bought cars and houses, travelled far and wide, underpinning an amazing boom in oil demand that jumped from just over 4 million b/d in 2000, to some 11 million b/d in 2015.
Where do we go from here? Chinese oil demand growth has been attributed as the reason for many things – US$100/b oil, regular smog in Beijing – but to expect it to continue at 10% growth rates indefinitely was always a fallacy. A slowdown was always coming, and has already happened. It doesn’t mean that there isn’t growth anymore, it just means the percentage gains aren’t as impressive numerically anymore, even though the absolute growth in numbers might be large.
China has a habit of wanting to do things itself. Chinese pride means the country will eventually want to be energy self-sufficient. It does not produce enough crude oil to feed its ravenous industrial belly, but instead of relying on imports, it is buying into foreign upstream assets strategically in hostile environments in African and the Middle East. Instead of importing refined oil products, it built its own massive refineries, including private teapot refineries that were allowed to import crude individually last year, becoming a net exporter in the process. It does not want to face crude shortage shocks, so it is filing up its massive strategic petroleum reserves. On this same vein, China is also looking to be a less hydrocarbon intensive in its future energy growth. High pollution problems in major cities have consistently been a political thorn and embarrassment to China’s shinning economic success. It has since embarked on a massive renewable energy initiative like no other country, optimising on its cheap manufacturing capability of solar panels and wind turbines.
So with a maturing, but still growing economy, and a massive build-up of domestic energy infrastructure, China now exerts influence in world oil markets in a different way now. Instead of being an ambitious upstart, it is now a calculating doyenne. The answer to China’s growth is no longer a simple equation of feeding booming demand, it is now a complex solution of strategic policies, acquiring assets and tactical partnerships. All this will need to be baked into the price curves for crude oil and upstream production; Chinese influence isn’t waning, it still carries a very large chunk of world demand. In 2030, Chinese oil demand will have probably risen only to 15-16 million b/d, hardly the tripling of the past 15 years, but within that gain is a huge array of development in quality, efficiency and utility.
Is there any country that can take China’s place, to replace it as a driver of demand? The immediate short answer is No.
However India is an obvious choice. India’s Minister of Petroleum and Natural Gas, Dharmendra Pradhan spoke to a group of investors this July 2016 proclaiming that “If you invest in India’s oil and gas sector, you will find that you have a market right here, and you don’t have to invest in export infrastructure”. Reflecting India’s has a vast domestic appetite for more hydrocarbon growth potential in the coming years. But despite its potential size, the very nature of its politics, government and private enterprise means it still lacks the top-down savvy of China to really drive growth in a sustained and controlled manner. Brazil is floundering in every way possible, and Russia is getting more isolated. None of the so-called ‘Next 11’ countries are big enough to ‘do a China’.
The Chinese oil miracle is a once in a generation event – much like post-WWII Europe and Japan in the 70s – and we are now in the flatter part of the future curve of oil demand. We may not yet have hit peak oil, but the Chinese boom is certainly one of the final basecamps before the summit. We need to accept this new reality.
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This winter, natural gas prices have been at their lowest levels in decades. On Monday, February 10, the near-month natural gas futures price at the New York Mercantile Exchange (NYMEX) closed at $1.77 per million British thermal units (MMBtu). This price was the lowest February closing price for the near-month contract since at least 2001, in real terms, and the lowest near-month futures price in any month since March 8, 2016, according to Bloomberg, L.P. and FRED data.
In addition, according to Natural Gas Intelligence data, the daily spot price at the Henry Hub national benchmark was $1.81/MMBtu on February 10, 2020, the lowest price in real terms since March 9, 2016. Henry Hub spot prices have ranged between $1.81/MMBtu and $2.84/MMBtu this winter heating season (since November 1, 2019), generally because relatively warm winter weather has reduced demand for natural gas for heating. Natural gas production growth has outpaced demand growth, reducing the need to withdraw natural gas from underground storage.
Dry natural gas production in January 2020 averaged about 95.0 billion cubic feet per day (Bcf/d), according to IHS Markit data. IHS Markit also estimates that in January 2020 the United States saw the third-highest monthly U.S. natural gas production on record, down slightly from the previous two months.
IHS Markit estimates that U.S. natural gas consumption by residential, commercial, industrial, and electric power sectors averaged 96 Bcf/d for January, which was about 4.4 Bcf/d less than the average for January 2019, largely because of decreases in residential and commercial consumption as a result of warmer temperatures.
However, IHS Markit estimates that overall consumption of natural gas (including feed gas to liquefied natural gas (LNG) export facilities, pipeline fuel losses, and net exports by pipeline to Mexico) averaged about 117.5 Bcf/d in January 2020, an increase of about 0.2 Bcf/d from last year. This overall increase is largely a result of an almost doubling of LNG feed gas to about 8.5 Bcf/d.
Because supply growth has outpaced demand growth, less natural gas has been withdrawn from storage withdrawals this winter. Despite starting the 2019–20 heating season with the third-lowest level of natural gas inventory since 2009, by January 17, 2020, working natural gas inventories reached relatively high levels for mid-winter. The U.S. Energy Information Administration’s (EIA) data on natural gas inventories for the Lower 48 states as of February 7, 2020, reflect a 215 Bcf surplus to the five-year average. In EIA’s latest short-term forecast, more natural gas remains in storage levels than the previous five-year average through the remainder of the winter.
According to the National Oceanic and Atmospheric Administration (NOAA), January 2020 was the fifth-warmest in its 126-year climate record. Heating degree days (HDDs), a temperature-based metric for heating demand, have been relatively low this winter, which is consistent with a warmer winter. During some weeks in late December and early January, the United States saw 25% to 30% fewer HDDs than the 30-year average. This winter, through February 8, residential natural gas customers in the United States have seen 11% fewer HDDs than the 30-year average.
Source: U.S. Energy Information Administration, based on National Oceanic and Atmospheric Administration Climate Prediction Center data
Headline crude prices for the week beginning 10 February 2020 – Brent: US$53/b; WTI: US$49/b
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