Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

At the risk of stating the obvious, China matters for oil prices. But its role this year and next is less obvious than you might think.

We all know China was the engine of the bull market in oil for much of the past decade:

As You Know...
China has accounted for 46 percent of global oil demand growth since 2005
Source: International Energy Agency
Note: Annual change in global oil demand by region.

Where it gets a little more complicated is beneath those headline figures for oil demand; "oil" isn't always oil.

For example, while the world used 95 million barrels a day in 2015, according to data from the International Energy Agency, refiners only processed about 79 million barrels a day of crude oil. That gap of 16 million barrels a day -- roughly equivalent to the combined output of Saudi Arabia and Iraq -- was filled via a combination of natural-gas liquids, direct burning of crude oil and biofuels; all stuff that doesn't go through refineries (see this for a more detailed discussion.)

Here is a different picture of global oil demand, courtesy of Kristine Petrosyan of the IEA's Oil Industry and Markets Division:

A Refined View
Demand for products like gasoline hasn't kept pace with output from refineries in the past couple of years
Source: International Energy Agency
Note: Data show annual change in crude oil processed by refineries and demand for refined products. Demand data for 2008-10 normalized to zero.

The thing to notice there is the big disparity between the amount of stuff being pumped out by refiners in 2014 and 2015 -- when cheap crude was boosting margins -- and how much consumers were actually taking. Altogether, it added up to perhaps 400 to 500 million barrels of refined products heading into storage.

That inventory acts as a source of swing supply, ready to be drawn upon if prices justify it -- and thereby making refiners very sensitive to market moves.

In its latest monthly report on the oil market, published last week, the IEA went out of its way to note how volatile refinery runs have been this year, with January's year-over-year gain of 1.8 million barrels a day flipping to a 1.8 million-barrel  drop as of May. For the full year, the IEA expects refiners to process just 270,000 barrels a day more crude oil than they did in 2015, the weakest growth since the global financial crisis.

The good news for oil bulls is that demand for refined products has risen faster than that. So the glut is being drawn down, something that can be seen most frequently in falling, but still bloated, U.S. gasoline and distillate stocks.

The bad news is that crude-oil production is rising faster than refinery runs. OPEC supply is up as its members jockey for position ahead of this month's supposed deal on a coordinated cut. Moreover, the biggest cuts in non-OPEC supply appear to be behind us, as output from countries such as Russia and Brazil keep climbing and U.S. production shows signs of bottoming out.

Where is that extra crude going, if not to refiners? The IEA estimates some 700,000 barrels a day has been going to China -- but not for processing into fuels. Rather, all that oil is believed to have gone into the country's strategic petroleum reserve. Like America's SPR, this oil is designed to stay put until there's a war or some other crisis, so it functions like real demand by sucking up barrels from the market.

Still, it should worry oil bulls that, in terms of growth, Chinese strategic stockpiling has been taking more than two barrels this year for every one taken by the world's refiners to feed underlying demand. China's growth in real oil demand this year is forecast to be just 259,000 barrels a day.

Beijing has no doubt been taking advantage of relatively low prices to build strategic reserves while it can. Having kept a floor under prices during the crash, though, the flip-side is that stockpiling will likely slow if prices rise too much.

With China's generals a bigger force than its drivers in this year's oil market, the pressure on OPEC to deliver this month is even greater than you might have thought.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net