China’s drop in oil demand is "warning sign’"

Experts fear that the significant drop in China’s oil demand in July is a warning sign that the country will not buoy up global demand as quickly, as market participants had expected.

Eugen Weinberg, head of commodity research at Commerzbank, says the news of China’s slowing demand should be seen as a “warning sign”.

“All the hopes for an increase in oil demand were pinned on China, so this will be a negative surprise,” says Weinberg. “US and European oil demand is dropping, so hopes for rising demand are all in the emerging countries and most of it is in China. If Chinese demand is going down already then the expectations for overall demand might be premature,” he adds.

China’s oil demand dropped by 5.6% this month, from June’s record high of 36.72 million metric tonnes to 25.82 million metric tonnes in July, according to Platts’ analysis of official data released by the People’s Republic of China.

However, Weinberg says it’s difficult to say whether July’s drop in demand is a temporary blip. “It’s very difficult to say whether this is only one time event or whether we’ll see a further drop over the coming months,” he says. 

Oil analyst at Barclays Capital Amrita Sen says the data needs to be taken into perspective. “If you look at June 2009, it was a very high base, so it’s purely base effects that are resulting in a weaker growth comparison because May to June last year was an extremely high growth by comparison,” she says. “Even when growth is slowing down to less than a million barrels per day, it’s still continuing to hit record highs,” she says.

The sharp drop in China's oil demand growth in July is a clear indication that Beijing's tightening policies are taking effect, says Mriganka Jaipuriyar, senior editor for Platts in Singapore: “With both industrial production and asset investment dropping in the month, it is not surprising that oil demand has slowed down too. Looking ahead, whether we actually see negative oil demand growth will depend on whether China decides to pursue its tighter policies or reverses them.”
 
Barclays Capital’s Sen agrees that government policy in China has been expected to drive a ‘soft landing’ in the Chinese economy. “China’s economy has been overheating and measures have been put in place to gradually cool the economy down. Secondly, the recovery in the first quarter was cyclical because Q1 in 2009 was very weak and it was expected that all countries would stabilise to normal growth rates,” she adds.

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