OPEC Has Its Way as China Oil Output Cut by Most in 15 Years

Updated on
  • Crude output in May falls 7.3%, biggest drop since Feb. 2001
  • Coal production slows 15.5% from year ago, local prices rise

China’s crude production dropped by the most in 15 years in another sign that OPEC’s strategy of flooding markets to drive out higher-cost suppliers is working in the world’s biggest energy consumer.

The Asian nation reduced oil output in May by 7.3 percent from a year ago to 16.87 million metric tons, according to data from National Bureau of Statistics released on Monday. That’s the biggest decline since Feb. 2001.

Shrinking Chinese output may help balance oil markets and sustain a more than 75 percent rebound in crude from a 12-year low earlier in 2016. The rally has also made the Organization of Petroleum Exporting Countries more confident its two-year Saudi Arabia-led strategy of trying to win market share from higher-cost producers is succeeding. The glut shows signs of ending as companies shut unprofitable fields and cut investments, according to forecasters from the IEA to Goldman Sachs Group Inc.

“It’s certainly an important indicator that global oil markets are rebalancing,” Michal Meidan, an analyst at industry consultant Energy Aspects Ltd., said by e-mail. “The Saudi strategy is starting to yield results.”

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Lower domestic output reflects spending cuts by the country’s oil drillers amid low prices, Gordon Kwan, head of Asia oil and gas research at Nomura Holdings Inc. in Hong Kong said in an e-mail. PetroChina Co., the nation’s biggest producer, said in March it expects oil and gas output to fall the first time in 17 years as it shuts fields that have “no hope” of turning a profit, while Cnooc Ltd. sees output slipping as much as 5.2 percent this year.

“Lower domestic oil production means that China will rely more and more on imports from Middle East and Russia,” Kwan said in the e-mail. The slump in output “is worse than our forecast,” he said.

Separately, data also showed China’s coal production fell by 15.5 percent, the most in data going back to April 2015, when the statistics bureau resumed releasing those figures.

Coal demand in China has slid as its economy slows and shifts toward consumer-led growth, while the government seeks to cut industrial oversupply and curb pollution. Output declined to 263.75 million tons in May, according to the bureau.

The pullback by local miners is boosting prices, said Deng Shun, an analyst with ICIS China. Spot power-station coal at the port of Qinhuangdao, a domestic benchmark, rose for the second time in three weeks to an average 400 yuan a ton as of Sunday, the highest level since September, according to data from China Coal Transport and Distribution Association.

— With assistance by Jing Yang

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