The report puts in perspective recent signs of economic expansion and strengthening oil demand in China. After a 6.8 percent GDP decline in the first quarter, industrial output and power generation have grown year-on-year since April. The PMI index, at 50.9 in June, remained in expansion territory for the fourth consecutive month. Boosted by generous subsidies, car sales grew by 15 percent from 2019 levels in May. At the same time, highway freight and passenger traffic were at 80 and 50 percent of 2019 levels, retail sales lagged 2019 levels by 3 percent, and May car sales were still weaker than 2018 levels. ESAI Energy warns that this latter set of indicators are evidence that oil demand is much weaker than implied demand for May suggest.
Meanwhile, China’s deteriorating geopolitics raises the prospect of disruptions to trade. In response to Beijing’s new national security law in Hong Kong, Washington started to revoke Hong Kong’s special status, which could damage the city’s role as a global financial hub where many Chinese firms obtain foreign capital. In addition, the recent border clash with India, the destination of 3 percent of China’s 2019 exports, triggered a ban on Chinese apps and has undermined bilateral trade and investment.
“In this unprecedented time, the outlook for Chinese oil demand is far from bullish,” points out Yao Wu at ESAI Energy. “Data indicate China’s apparent oil demand suggest oil consumption reached a record high in May. This apparent demand includes considerable unreported stock-building, according to ESAI Energy analysis, which means actual oil consumption was at least 1 million b/d lower. On top of that, worsening international relations add downside risk to the economy that has bearish implications for China’s oil consumption.”