China’s Economy Is Picking Up, But Oil Demand May Disappoint
China’s economy grew by 2.2 percent on a seasonally adjusted basis in the first quarter (Q1), a massive improvement on the previous quarter’s 0.6 percent growth. Also positive from the economic perspective was that this was the third straight quarterly expansion after China began to ease COVID-19 restrictions in the second half of last year. This said, unlike much of China’s stellar economic growth from the mid-1990s to before the COVID-19 pandemic hit in 2020, this growth may not translate so directly into equally startling rises in the price of oil. The previously very direct correlation between China’s economic growth and oil prices was evidenced in the fact that almost on its own it drove the super-cycle of ever-rising prices for commodities key to its economic growth over that period. One such commodity was oil, which was vital to powering the country’s largely manufacturing-led economic boom during those years. Because of the massive disparity between the sheer scale of China’s energy needs and the paucity of its own oil and gas resources, the country quickly became the big bid in the global oil market. By 2013, it had become the world’s largest net importer of total petroleum and other liquid fuels, and by 2017 it had overtaken the U.S. as the largest annual gross crude oil importer in the world as well. It is unsurprising, then, that many in the current oil market have been waiting for signs of a big recovery in China’s economic growth, believing that it will automatically herald a big bounce in oil prices. The first part of this equation may well be taking place, as not only were Q1’s figures good but they may well become better. “The Q1 [GDP] number surprised to the upside, and the momentum of domestic demand puts upside risks to our 5.5 per cent GDP forecast for 2023,” Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com last week. “Looking ahead, low base effects – including the Shanghai lockdown, which lasted more than 60 days in Q2 2022 – will push up the annual prints in Q2 this year, so, assuming domestic demand remains on a path to recovery in the coming months, Q2 GDP will likely rise to around 8 per cent year on year,” she added. Further signs that China’s economic growth rebound may surprise on the upside have come from its long-beleaguered property sector. Although property price inflation remains in negative territory, prices continue to post monthly improvements, with 64 out of 70 cities now reporting monthly price gains. Home sales have also surprised on the upside, coming from various Tier-1 and Tier-2 cities, with existing homes and China’s state-owned enterprise developers topping the transaction charts, Rory Green, chief China economist for TS Lombard, in London, exclusively told OilPrice.com. There is still caution evident in the market, he said, with the composition of sales indicating that consumers remain concerned about the viability of pre-sales, which make up 70-80 per cent of total transactions. However, highlighted Green, although the speed and magnitude of the rebound in China’s property market remain in question, a bottom appears to have formed in it. This said, the second part of the equation – that a strong Chinese economic rebound will automatically herald a big bounce in oil prices – is far less certain. The first part of China’s massive economic growth was founded on a huge energy-intensive expansion of its manufacturing capabilities. This also involved the mass migration of new workers from the countryside and into the cities, which required a huge energy-intensive infrastructure build-out. This change marked the second phase of China’s economic growth mix. This continued for years, alongside the third phase of China’s economic growth, which was the rise of a middle class that powered domestic consumption-led demand for goods and services. All these phases to date had the net result of increasing China’s demand for energy exponentially, to the point where it is now – for oil alone – around 15 million barrels per day (bpd). This is around 19 per cent of world demand for crude oil. The problem for unreconstructed oil bulls is that the nature of this current phase of economic growth in China is not like any that the markets have seen before. “China’s central leadership is relying on reopening and the removal of negative policies – property, consumer internet, and geopolitics – rather than aggressive stimulus, to drive activity,” TS Lombard’s Green told OilPrice.com. “For the first time, a cyclical recovery in China will be led by household consumption, mainly services, as there is a great deal of pent-up demand and savings – about 4 per cent of GDP – following three years of intermittent mobility restrictions,” he added. For oil prices, he underlined, it is apposite to note that transportation accounts for just 54 per cent of China’s oil consumption, compared to 72 per cent in the US and 68 per cent in the European Union. In 2022, net oil and refined petroleum imports were 8 per cent lower by volume than the pre-pandemic peak, with infrastructure and export-oriented manufacturing partly offsetting lower mobility and less property construction. “Demand drivers should switch this year, with travel rising and property less negative, while infrastructure and manufacturing slow,” said Green. “The certain outcome is an increase in oil demand – we estimate a 5-8 per cent increase in net import volumes – but this is unlikely to cause oil prices to surge, especially as China is buying at a discount from Russia,” he concluded.
U.S. Stresses Importance Of LNG For Europe
Russian President Vladimir Putin belied that his invasion of Ukraine in 2022 would go largely unopposed by the U.S. and its allies for the same reason that he was able to invade the country in 2014 and annex Crimea. That is, that the non-U.S. part of the North Atlantic Treaty Organization (NATO) – Europe – would not to risk being cut off from the cheap and plentiful supplies of Russian gas that they had been using for decades to power their economies. He was wrong this time, for a variety of reasons analysed in my new book on the new global oil market order. Not only were the NATO allies not prepared to roll over this time in favour solely of their own interests but Putin’s actions in Ukraine have re-energised the U.S.-led security, economic, and energy alliance comprising most European countries and many Asian ones as well. To safeguard these gains, the U.S. last week stressed the necessity for the allies to ramp up investments in gas to ensure that never again would the alliance be hostage to the weaponised energy supplies of Russia. Speaking at a G7 ministers’ meeting on climate, energy and environment in Japan, U.S. Assistant Energy Secretary, Andrew Light, highlighted the need for continued investments by the allies in new gas supplies. He also stressed that U.S. liquefied natural gas (LNG) supplies remain critical to European energy security as it continues to reduce its reliance on Russian gas. He added that the U.S. is not concerned about Russia still being able to sell its oil and gas, despite sanctions, as it is allowing countries to buy energy at lower prices. This feeds into the idea that the price cap on Russian energy sales is also part of the U.S.’s broader policy of keeping oil and gas prices down, and with the ‘Trump Oil Price Range’, as also analysed in my new book on the new global oil market order. This is not only for the U.S.-centric economic and political reasons examined in the book, but also because rising energy prices drive inflation higher, in turn pushing fuelling the interest rates used to combat it, and increasing the prospect of recession in many of the U.S.’s allies. Interestingly as well, and in keeping with the geopolitical realignment evident since Russia’s invasion of Ukraine, Light also underlined that the U.S. and its allies are also looking to diversify the supply chains of materials that have long been dominated by China. “We don’t want to be at the mercy of China and put them in the same position vis a vis the rest of the world as Russia has been with Europe,” Light concluded. Prior to Russia’s invasion of Ukraine, the only real flurry of activity in terms of a concerted effort by any group within the European Union (EU) was aimed at ensuring that Russia did not stop supplying its member states with either oil or gas, due to their not being able to pay in the way Moscow preferred. This followed the 31 March 2022 decree signed by President Vladimir Putin that required EU buyers to pay in roubles for Russian gas via a new currency conversion mechanism or risk having supplies suspended. According to an official guidance document sent out to all 27 EU member states on 21 April by its executive branch, the European Commission (EC): “It appears possible [to pay for Russian gas after the adoption of the new decree without being in conflict with EU law],… EU companies can ask their Russian counterparts to fulfil their contractual obligations in the same manner as before the adoption of the decree, i.e. by depositing the due amount in euros or dollars.’” The EC added that existing EU sanctions against Russia also did not prohibit engagement with Russia’s Gazprom or Gazprombank beyond the refinancing prohibitions relating to the bank. Several EU member states made it plain that they would veto any EU proposal to ban Russian gas (or oil) imports – and all 27 EU member states must vote in favour of such a ban for it to come into effect. However, under considerable ‘encouragement’ from the U.S., Germany – the de facto leader of the EU – performed a 180-degree turnaround in its previously fiercely pro-Russian energy stance, bolstered in the first instance by a U.S.-led deal for LNG supplies from Qatar. LNG remains the most flexible form of gas for buyers, being readily available in the spot markets and able to be moved very quickly to anywhere required, unlike gas sent through pipelines. Unlike pipelined gas as well, the movement of LNG does not require the time- and money-intensive build-out of vast acreage of pipelines across varied terrains and the associated heavy infrastructure that supports it. In essence, LNG supplies are the ‘swing gas supply’ in any global gas supply emergency, as was the case back then in the first half of 2022. May of that year, then, saw Qatar sign a declaration of intent on energy cooperation with Germany aimed at becoming its key supplier of LNG. These new supplies of LNG from Qatar would come into Germany through existing importation routes augmented by new infrastructure approved by the German Bundestag on 19 May. This would include the deployment of four floating LNG import facilities on its northern coast, and two permanent onshore terminals, which were under development. These plans would run in parallel with, but were likely to be finished significantly sooner than, the plans for Qatar to also make available to Germany sizeable supplies of LNG from the Golden Pass terminal on the Gulf Coast of Texas. QatarEnergy holds a 70 per cent stake in the project, with the U.S.’s ExxonMobil holding the remainder. The Golden Pass terminal’s estimated send-out capacity is projected to be around 18 million metric tonnes per annum (mtpa) of LNG and the facility is expected to be operational in 2024. Also heavily linked in with the U.S. was a very similar announcement in December
OPEC’s share of Indian oil imports down to 22-year low. Here’s why
OPEC’s share of India’s oil imports fell at the fastest pace in 2022/23 to the lowest in at least 22 years, as intake of cheaper Russian oil surged, data obtained from industry sources show, and the major producers’ share could shrink further this year. Members of the Organization of the Petroleum Exporting Countries (OPEC), mainly from the Middle East and Africa, saw their share of India’s oil market slide to 59% in the fiscal year to March 2023, from about 72% in 2021/22, a Reuters analysis of the data that dates back to 2001/02 showed. Russia overtook Iraq for the first time to emerge as the top oil supplier to India, pushing Saudi Arabia down to No. 3 in the last fiscal year, the data showed. OPEC’s share shrank as India, which in the past rarely bought Russian oil due to high freight costs, is now the top oil client for Russian seaborne oil, rejected by Western nations following Moscow’s invasion of Ukraine in February 2022. India shipped in about 1.6 million barrels per day (bpd) of Russian oil in 2022/23, the data showed, about 23% of its overall 4.65 million bpd imports. The decision by OPEC and their allies, a group known as OPEC+ to cut production in May could further squeeze OPEC’s share in India, the world’s third largest oil importer, later this year if Russian supplies stay elevated.
Built And Financed By India, Mongolia’s First Greenfield Oil Refinery To Be Ready By 2025
Mongolia’s first oil refinery, being built on the outskirts of the capital city, Ulaanbaatar, and funded with Indian assistance, will be completed by 2025, said the country’s Ambassador Dambajav Ganbold. In an interview with a Livemint, Ganbold said the first stage of Mongol Oil Refinery, built with a $1.2 billion Indian soft loan, will be completed at the end of this year. The development assumes significance as Mongolia is entirely dependent on Russia for its energy imports and the new refinery at Altanshiree Soum in the country’s Dornogobi province would help Mongolia meet 70 per cent of its demand domestically. It’s being seen as a major step amid the crisis because of the Russia-Ukraine war and the cost of oil shooting up manyfold. It was in 2015 during the visit of Prime Minister Narendra Modi to Mongolia that an agreement between the governments was made to establish the first oil refinery in Mongolia. The Mongol Refinery is being developed under a government-to-government (G2G) partnership between Mongolia and India. It forms part of the Development Partnership Administration initiative of India’s Ministry of External Affairs (MEA). The project, which is the first greenfield oil refinery in Mongolia, includes a pipeline and a power plant as part of its operations. Upon completion, the refinery will have the capacity to process 30,000 barrels of crude oil per day or 1.5 million tonnes per annum. The refinery project consists of four packages. The first package, or EPC 1, is more than 70 per cent complete right now and will be completed within this year. It was in 2019 when the construction had started on the first phase of the project. The remaining three packages have gone through the tender process and Hyderabad-based Megha Engineering and Infrastructures Limited (MEIL) has been selected. The company would provide would provide EPC (engineering, procurement and construction) services and EPC-3 (captive power plants) at a cost of $790 million using advanced technology. Under the EPC deal, MEIL will build open art, utilities and offsites, along with plant buildings, and captive power plants for the refinery.
Explained: Why are global crude oil prices falling
Global crude oil prices have been falling gradually over the past few months and the trend seems no signs of reversing anytime soon. Oil prices continued their downward trend on Monday due to a range of global factors that have clouded its demand outlook. Rising interest rates and the ongoing global economic slowdown have also impacted crude oil prices, despite the prospect of tighter supplies on OPEC+ supply cuts. Brent crude and US West Texas Intermediate crude were down on Monday, marking their first weekly drop in over a month. Oil prices have been hurt by the growing fears of a recession in the US, which is the top oil consumer in the world. Weak US economic data and weaker-than-expected corporate earnings from the tech sector have cast a shadow over future growth, leading to cautious sentiments about the commodity among investors. CMC Markets analyst Tina Teng told news agency Reuters that the stabilisation of the US dollar and climbing bond yields are pressurizing commodity markets. It may be noted that central banks around the globe are expected to raise interest rates in May in a bid to tackle high inflation. This could further impact demand for crude oil among major oil-importing nations. Moreover, China’s edgy economic recovery after the Covid-19 has also clouded oil demand outlook, even as Chinese customers’ data showed on Friday that the world’s top crude importer brought in record volumes in March. China’s imports from top suppliers Russia and Saudi Arabia were more than 2 million barrels per day each. John Driscoll, director of JTD Energy Services, told news agency Reuters that the recent correction in oil prices is due to mixed economic data and continued central bank intervention. Meanwhile, analysts and traders remained bullish about China’s fuel demand recovery towards the second half of 2023 and as additional supply cuts planned by OPEC+ from May could tighten markets. Analysts at the National Australia Bank expect China’s oil demand recovery to more than offset the slowdown in OECD demand in the near term, while sanctions and supply constraints add upside risks to prices. They said that Brent could rise to $92 per barrel by the end of the second quarter.
GAIL to get 4 LNG cargoes from Germany’s Sefe in May
Indian gas firm GAIL (India) Ltd will get 4 cargoes of liquefied natural gas (LNG) from Germany’s Sefe in May, equivalent to volumes it was getting under a deal with a former unit of Russia’s Gazprom, Chairman Sandeep Gupta said on Monday. Sefe supplied 2 LNG cargoes each in March and April. “Sefe will decide on volumes on a month to month basis,” Gupta told reporters on the sidelines of an event. The resumption of supplies from Sefe is crucial for GAIL, which reported an almost 93% slump in its December quarter profit due to lower gas sales triggered by supply disruptions. GAIL agreed to a 20-year LNG purchase deal with Russian energy giant Gazprom in 2012. The deal was signed with Gazprom Marketing and Singapore (GMTS) for annual purchases of an average of 2.5 million tonnes of LNG. At the time, GMTS was a unit of Gazprom Germania, now called Sefe, but the Russian parent gave up ownership of Sefe after Western sanctions were imposed on Moscow over its invasion of Ukraine last year.