For some time now, oil commentary has been narrowly focused on two opposing supply-side components: OPEC’s production cuts agreement and the US shale oil boom.
But there is maybe a third major factor that is not highlighted so much, but may have a major impact on oil prices in the near future - and that is China.
China’s own oil production is peaking and expensive to extract, and its domestic consumption vastly, and increasingly, exceeds its own production. But it is the scale of both China’s production and its consumption that makes this significant. Both are huge and any significant changes in either of these will have significant implications for the world oil markets…
[U][B]China as a producer[/B][/U]
China is one of the world’s five largest oil producers, along with Saudi Arabia, the US, Russia, and Canada. But its fields are depleting, ageing and increasingly expensive to pump. Today’s lower oil prices also reduce producers’ incentives to boost drilling and increase production.
As in the US, China also has large potential shale oil reserves but exploiting these is hampered by local legal, regulatory, and ownership facors. Also, geologically, China’s shale oil is located in rock layers that are more ductile and less “fracable” than the brittle marine shales found in the US.
China also has offshore drilling projects but their potential production is only likely to slow down the rate of reduction in conventional drilling rather than replace it.
[U][B]China as a consumer[/B][/U]
China is also a massive importer of crude. Its dependence on imported oil started in 1993 when demand began rising faster than its domestic production. According to the EIA, China became the world’s largest net importer of petroleum by the end of 2013and in 2015, imported a record 6.7m barrels a day.
[U][B]China’s oil sector[/B][/U]
China’s oil industry is dominated by its state owned oil companies, mainly China National Offshore Oil Corporation, China National Petroleum Corporation, China National Refinery Corp, and Sinopec. These companies have responsibility for developing the country’s domestic reserves, building and operating pipelines, managing China’s downstream sector, and filling its strategic petroleum reserves (SPR). China has one of the world’s largest strategic oil reserves. These global strategic petroleum reserves (GSPR) refer to stockpiles of crude oil held for national security during an energy crisis.
Investment by these companies has largely been targeted towards exploration and development in other countries that had oil fields but not have funds or technology to develop them.
In 2009, China also completed its first critical oil pipeline, the Kazakhstan–China oil pipeline in Central as part of a larger overall trade expansion with the Central Asian region
[/B][/U]The huge impact of any changes in China’s growth is understandable when we consider that Chinese oil demand is expected to expand by 400,000 barrels per day to 12.3 million barrels per day (mb/d). This Chinese growth alone is essentially almost one-third of the total global demand growth, estimated at around 1.3 mb/d this year. So any softening in demand will be significant in a global market already saturated with oil.
On the other hand, if China has a stronger economic performance, it could also boost momentum to a tightening oil market. With expected strong demand figures and a falling domestic oil production this translates into increased need to import more crude to make up for the shortfall.