China's Oil Demand Rising

Jim Brown
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It should be no surprise to anyone that oil demand is rising in China but the speed of the increase is faster than previously thought. China is expanding their crude oil purchases to include Libya and Angola.

According to UBS China should see a peak in domestic oil production around 4 million barrels per day. They consumed 7.5 mbpd in 2009 and that is expected to surpass 9 mbpd in 2010. UBS expects China to be forced to increase its refining capacity by 10% by 2014. The message from UBS to investors is to stay long crude with prices expected to rise to $90-$100 in 2010.

Saudi Arabia shipped 1.18 million bpd to China in December with the monthly average around 900,000 bpd. Saudi Arabia's exports to China already exceed those shipped to the United States. China's imports from Angola rose 53% in 2009 and imports from Libya rose 250% to 146,000 bpd. Sinopec is working on a deal with Libya to up that to 200,000 bpd later this year. Imports from Kuwait rose 33% to 177,000 bpd. China also added Iraq as a supplier with a 154,000 bpd contract. China had not purchased from Iraq in the recent past. China appears to be shopping for price as each of those countries sells grades competitive to Saudi oil but for a few cents cheaper. I believe China is just trying to develop working relationships with as many suppliers as possible ahead of the next demand cycle when crude supplies will tighten. It is easier to lean on an existing supplier for favors than develop a new supplier when oil is at a premium.

Bloomberg reported fuel oil shipments to Asia are increasing +33% in March. Fuel oil is used to power ships or burned to generate electricity. An estimated 15 super tankers have been chartered to make the six week journey from Europe to Singapore in March. They will be delivering 4 million metric tons, up +33% from the monthly average of 3 million tons in 2009. Since January fuel oil inventories at Rotterdam have fallen to 577,000 tons, 38% below the record of 935,000 tons in 2009. Singapore stockpiles have increased +13% to 3.3 million tons.

In other news the IEA said global oil production declined by 40,000 bpd in January from December levels. Production of total liquids was 85.83 mbpd. That is crude production and condensates. Average daily production was 84.94 mbpd in 2009, 86.6 mbpd in 2008 and 85.32 mbpd in 2007.

Theoretical global production capacity rose by 85,000 bpd to 89.45 mbpd. That excludes spare capacity estimates from Iraq, Venezuela and Nigeria because of the unreliability of the data and in the case of Nigeria the instability of production. OPEC spare capacity is thought to be 5.54 mbpd of which 3.8 mbpd id Saudi Arabia and the rest spread around fractionally in the rest of the OPEC countries. That 5.54 mbpd is about the amount of capacity we lose each year from depletion.

Iran said it had plenty of gasoline and could easily survive any gasoline embargo. The director fo the National Iranian Oil Products Company said they had plenty of gasoline stockpiled and had plenty of refining capacity to create their own gasoline if sanctions were enacted. This is total crap because Iran imports 40% of its gasoline. There is no way they could suddenly refine an extra 8 million gallons per day. Gasoline consumption has risen about 13% per year over the last five years to 18.5 million gallons per day. Current refining capacity is 10.5 mgpd. To suddenly jump to 18.5 mgpd would be impossible.

Iran sells gasoline to its citizens at about a fifth of its actual cost or roughly 11-cents per litre. This costs Iran $7 billion a year in subsidies. Iran is trying to limit gasoline consumption by rationing. The first 120 litres are 11-cents with a bump to 40-cents after the first 120 litres are gone. The rationing plan was instituted in 2007 and has undergone several revisions in the years following. Most believe it is worthless today because of smuggling, the black market and 45 categories of consumers who are receiving additional gasoline at the cheaper prices in order to quell unrest.

Iran is trying to convert the country's cars to compressed natural gas (CNG) by 2015 because of the gasoline problem. Iranian factories produce about one million vehicles per year.

Jim Brown

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