China's Demand for Oil Is Totally Misunderstood by the Market

29-Sep-2015

Amid sinking crude prices, there's been an almost singleminded focus on supply dynamics in the oil market, particularly on the resilience of U.S. production, which has proven nearly impervious to large-scale declines in the number of active rigs.


Although tentative signs suggest domestic crude production is rolling over, analysts led by Laban Yu, head of Asia oil and gas equities for Jefferies, think it's time to focus on what's going on at the other side of the ledger on the other side of the world.

Yu's team has grown more than a little sick of reports linking weakness in crude oil prices to softening economic data in China. There's one big problem with this narrative, according to the analysts: Chinese oil demand is actually quite robust, up 9.2 percent year-over-year, as of August.

In this case, lower prices have spurred demand; annual demand growth from January to August of this year totaled 5.7 percent, well above its rate of 1.6 percent in 2014.

"We believe the market is missing China's strengthening oil demand, just as it missed weakening demand three years ago," wrote Yu. "China is pulling a 'head fake', which, we believe, could whiplash prices." (by Luke Kawa, Bloomberg)