Amid sinking crude prices, there's been an almost singleminded focus on supply dynamics in the oil market, particularly on the resilience of U.S. production, which has proven nearly impervious to large-scale declines in the number of active rigs.
Although tentative signs suggest domestic crude production is rolling over, analysts led by Laban Yu, head of Asia oil and gas equities for Jefferies, think it's time to focus on what's going on at the other side of the ledger on the other side of the world.
Yu's team has grown more than a little sick of reports linking weakness in crude oil prices to softening economic data in China. There's one big problem with this narrative, according to the analysts: Chinese oil demand is actually quite robust, up 9.2 percent year-over-year, as of August.
In this case, lower prices have spurred demand; annual demand growth from January to August of this year totaled 5.7 percent, well above its rate of 1.6 percent in 2014.
"We believe the market is missing China's strengthening oil demand, just as it missed weakening demand three years ago," wrote Yu. "China is pulling a 'head fake', which, we believe, could whiplash prices."
The perception that Chinese demand for oil has softened has "become embedded in oil prices," the analyst asserted.
The composition of Chinese oil demand has shifted, reflecting policymakers' attempts to rebalance to growth driven more by domestic demand, rather than infrastructure projects fueled by subsidized credit.
As such, industrial demand for petroleum (think products such as diesel) has virtually flatlined, while consumption of gasoline and kerosene trends higher:
But putting together a picture of oil demand in the world's second-largest economy is a bit like assembling a puzzle with pieces from a number of different boxes.
"We believe the most accurate accounting of final demand is Refiner Throughput (China NBS) + Net Product Imports (customs) + Change in Inventories (China OGP)," wrote Yu. "All of these metrics are reported by different sources and net imports need to cobble together data for gasoline, diesel, kerosene, fuel oil, base oil, naphtha, lubricants, LPG, bitumen, petroleum coke, paraffin and other petroleum products."
Because of the difficulties involved in compiling these data, Yu said the press often gravitates toward such imperfect proxies as crude imports, product exports, car sales, and industrial data, which tend to muddy the picture, rather than clarify it.
The analyst took particular exception to the employment of falling car sales to infer Chinese oil demand. Car registrations are a better metric of vehicles being added to the road, he wrote. These have been rising.
"We also believe China's privately owned vehicles are starting to be driven more after spending years as parked trophies of middle-class aspiration," added Yu.