China is now world's top crude oil buyer

SINGAPORE - China overtook the United States as the world's top importer of crude oil for the first time in April, and its purchases are expected to remain strong despite a slowing economy, with far-reaching consequences for global oil and commodities markets.

The soaring imports came as a surprise as growth in the world's second-largest economy was sputtering and its oil demand was expected to ease. However, low oil prices and China's series of interest rate cuts - including one over the weekend - in a bid to stoke growth are factors boosting demand.

China's crude oil imports hit a record of almost 7.4 million barrels a day (bpd) last month, putting it ahead of the United States' estimated imports of 7.2 million bpd for April, Reuters data show.

While China may drop back to second place in some months ahead, it is clearly headed towards overtaking the United States as the world's top crude importer on a permanent basis.

China is already the world's biggest energy consumer, with oil by far the largest traded energy market. Overtaking the United States means China is the top user of almost all commodities, including coal, iron ore and most metals, with far-reaching implications for markets which continue to shift from West to East.

"Being the world's biggest crude importer should give China more buying power. China's engagement in the Middle East will continue to change, and it will no longer be the minority player," said Philip Andrews-Speed, head of energy security research at the National University of Singapore.

"China becomes not only more important to Middle Eastern states, but the Middle East becomes progressively more important to China relative to other countries that are importing less oil," he added.

A 60 percent drop in global oil prices between June 2014 and January due to a supply glut encouraged China to build stocks, changing both trade flows and oil politics.

Within a decade, oil producers around the world have had to fundamentally adjust their trade routes as U.S. imports fell from over 10 million bpd 10 years ago to around 7 million bpd currently, just as China's imports have risen seven-fold.

The Saudi-led decision by the Organization of the Petroleum Exporting Countries (OPEC) in November 2014 not to cut production despite the slide in oil prices has been largely motivated by an effort to defend market share against outside competitors like Russia or U.S. shale producers.

GLOBAL IMPACT

Saudi oil minister Ali al-Naimi was on a high profile visit to China and other Asian countries in April when he announced near record Saudi oil production and said he was "very positive" about continued strong demand from China.

China's nascent role as the world's top crude buyer is also impacting trading.

The crude market has been traditionally dominated on the buy-side by Western oil majors such as ExxonMobil, Royal Dutch Shell, Chevron or BP or merchants like Vitol and Mercuria. Now, Chinese traders are increasingly active.

Companies like Unipec or China Oil, the respective trading arms of Chinese national oil companies Sinopec and PetroChina, have entered oil markets on an unprecedented scale.

With prices still relatively low, China's demand is expected to rise.

"They will definitely continue to buy more crude to fill up new storage capacity, both strategic and commercial," said Seng Yick Tee, director of SIA Energy in Beijing.

source: www.abs-cbnnews.com

When will oil prices stop falling?

SINGAPORE - Oil prices will continue to drop as high production meets weak demand and a strong U.S. dollar pressures crude, and markets will only pick up once major manufacturing economies particularly in Asia feel the benefit of cheaper energy.

Oil prices LCOc1 CLc1 have halved since last June to near 6-year lows as economic growth stutters, and analysts say that a building supply glut means prices are set to fall further before any rebound. O/R

On the supply side, downward pressure on oil has come from a boom in U.S. shale oil output and, more recently, by the Organization of the Petroleum Exporting Countries' (OPEC) decision not to cut output in support of prices, and instead try to defend market share against North American shale by offering discounts.

"The risks to oil prices remain skewed to the downside in the near term," ANZ Bank said on Wednesday.

"(US) shale producers won't start feeling the pinch for another six months. In addition, there is the prospect of further supply increases from highly stressed OPEC members such as Libya, Nigeria and Venezuela, which could place further downward pressure on prices," the bank added.

There's also more oil in the system as slowing economies are using less and as energy efficiency improves.

In Asia, Japan is battling recession, while in China, the commodity boom driver in recent years, demand is slowing as the world's second-biggest economy shifts from energy-intensive construction to consumer-fuelled growth.

Citi this week predicted China's crude oil imports would grow more slowly this year, adding that "anyone hoping for China to drive a rebound in oil prices is likely to be disappointed."

Adding to the slack in Asia is that Europe has yet to recover from its post-credit crunch crisis in 2008-09.

Another drag on oil comes from the dollar. With the U.S. Federal Reserve expected to raise interest rates this year for the first time since 2006, supported by healthy growth, the dollar is likely to keep strengthening, putting more pressure on oil markets as European and Asian currencies fall.

BOON FOR CONSUMERS

While the immediate outlook for oil remains weak, analysts say cheaper fuel costs for households and businesses should at some point support demand, especially in manufacturing-led economies.

"The collapse in oil prices looks set to wipe out the Gulf's external surpluses next year, leaving China and the euro-zone as the world's major surplus economies," Capital Economics said in December.

Citi noted that lower oil prices could save China more than 1 percent of GDP on imports, helping boost consumption.

In Japan, cheaper fuel costs will not only benefit large industry, but also help reduce an enormous deficit, triggered in part by soaring fuel imports following the shutdown of its nuclear power plants after the 2011 Fukushima reactor meltdown. (Full Story)

For India, Asia's No.3 economy, lower oil imports will also be a boon. "Growth prospects have improved ... as lower oil prices will allow households and businesses to increase spending and the central bank to loosen monetary policy," research firm PIRA Energy said.

Analysts say oil prices will bottom out and start to rise again - part of the so-called commodity supercycle - once some producers scale back production to adjust to falling prices and major manufacturing centres begin to feel the economic benefits of cheaper energy and again start using more.

source: www.abs-cbnnews.com