Gasoline Cocktails Mix With Data Gaps to Skew China Oil View

  • Chinese data underestimating strength of fuel demand growth
  • Unrecorded use of off-spec gasoline disguises true consumption

Tales of the demise of China’s appetite for oil have been greatly exaggerated.

Fuel use grew by about 5 percent in the first half of 2016, according to China’s biggest oil refiner, faster than the 0.4 percent derived from government data. That “official” number is clouded by rising gasoline exports -- some to buyers as far flung as New York -- while drivers back in the world’s biggest energy user rely more on blends that don’t show up in official figures, according to the International Energy Agency, Sinopec Group and Energy Aspects Ltd.

“Chinese official stats are not capturing product demand correctly,” said Michal Meidan, an analyst at London-based Energy Aspects. “Product demand is not as dire as official stats make it seem, but the upshot is limited.”

China’s government publishes monthly crude and fuel data on imports, exports and domestic output. Those are used to show what’s known as implied or apparent demand: add imports to domestic production and subtract exports. What’s left was either stored or used -- unless the data in the calculations doesn’t capture all the fuel being consumed.

The “true level” of China’s gasoline demand is likely higher than what official data implies as large quantities of blended gasoline make their way into the market and “officially produced” volumes are exported, the International Energy Agency said in it’s latest monthly oil market report.

Welcome News

That should be welcome news for the Organization of Petroleum Exporting Countries and other oil producers suffering from an oil price crash that’s dragged on to a third year amid a persistent supply overhang. China is the world’s largest petroleum importer and its demand growth since the start of 2000 has accounted for more than a third of the world’s total. Brent crude traded at $52.70 a barrel at 11:11 a.m. London time. On Monday, prices rose to the highest close since August 2015.

The long-term outlook for gasoline is bullish and driven by demand growth in emerging markets, which will offset stagnant consumption in northwest Europe, the U.S. and Japan, BMI Research said in an Oct. 10 report. Asia’s market for the motor fuel will move into a deficit from 2018 led by consumption growth in China and India.

“Demand is much bigger than people think," said Fereidun Fesharaki, chairman of consultant FGE in Singapore. China’s gasoline consumption is growing by 8 percent to 9 percent this year, compared with a 0.4 percent drop in diesel usage, as the country imports octane-boosting gasoline components to blend into the fuel pool, he said.

Off-Spec Discount

Li Zhenguang, a senior economist with Sinopec Group, the country’s biggest oil refiner, said official government statistics aren’t accounting for a sizable amount of so-called off-specification gasoline that doesn’t meet quality standards. The fuel isn’t reported as being produced, but is being blended with higher-quality fuel and then sold to drivers.

“Through our survey we found there are some off-specification oil products available in the market along with qualified grades because of price discount,” Zhenguang said at a conference in Singapore last month. “We also witnessed that the supplies of off-the-grade specs increased aggressively when the discount widened as consumers chase low prices and use substitutes.”

Chinese authorities are also having trouble tracking refinery activity because of the surge of processing by independent refiners, known as teapots, according to Energy Aspects’ Meidan. As well, diesel use may be understated because of product reclassification and occasional smuggling that at times amounts to 150,000 barrels a day, she said. That’s a discrepancy of nearly 5 percent from the country’s total implied consumption of the fuel.

Data Mystery

The Shanghai customs office said in January it arrested 21 people accused of smuggling about 23,000 tons (almost 172,000 barrels) of diesel from “foreign” ships into the city and surrounding regions, according to official Xinhua News Agency.

The National Development and Reform Commission, China’s top planning agency, didn’t respond to a faxed request for comment. The IEA estimates the country’s total oil demand at about 11.64 million barrels a day, accounting for roughly 12 percent of global consumption.

China is not the only country in the world having trouble with data. The U.S. Energy Information Administration in August adjusted crude output 152,000 barrels a day higher to address disparities between weekly and monthly data.

Analysts are also dealing with another China energy mystery: Deciphering how much crude is being used by refiners and how much is being stored in strategic reserves, about which the government infrequently releases data.

Mixed Signals

China’s strategic petroleum reserves program aims to hold enough crude to meet 100 days of demand. The government has only reported how much oil is in storage as of January, leaving traders to question how much has been bought since.

“In the second half of this year, buying will be supportive of prices, as there are more SPR fills on the way and higher runs” by the country’s refiners, Meidan said. “Interpretations of demand and stockpiling continue to vary widely, sending extremely mixed signals about Chinese demand."

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