TOKYO (MarketWatch) -- China's oil demand has grown even as its production declines but analysts question whether the nation's healthy appetite for crude will last, and cast doubt on whether its demand can single-handedly offset an expected global drop-off in consumption this year.
That's part of the reason why recent upbeat data on Chinese demand hasn't provided any lasting impression on the oil market or helped crude prices hold their ground above the $70-per-barrel level.
China, the world's second-largest consumer of oil and the fastest single-growing market, consumes a little more than 7 million barrels per day, according to Dave Ernsberger, senior editorial director for Asia at Platts.
With that in mind, "China is looked at as sort of the fortune cookie for the world right now," said Kevin Kerr, president of Kerr Trading International. "Demand is key if oil prices are going to get back above $75 or $80 and all eyes are on China as an indicator of when the global economic engine will begin firing again."
But with world oil demand down about 2 million barrels per day from last year's levels, "growth in Chinese demand can not alone make up for the overall fall in world demand," said Ernsberger.
China consumed 33.23 million metric tons of oil in May, up 6% from the same month a year ago, according to a recent Platts analysis of official data. One metric ton represents about 7.3 barrels.
"If China maintains strong year-on-year demand growth, it could cause oil prices to rise quickly, as it is bullish news on top of the present trend of funds coming back into oil as an asset class investment," said Robert "Tony" Nunan, an assistant general manager at Mitsubishi Corp. in Tokyo.
Oil traders aren't quite so convinced yet. Crude futures traded at a three-week low under $67 per barrel this week.
Demand from China may be up, but "global demand for crude is off 2.9% year over year, with U.S. demand down 4.9%," said James Bibbings, associate editor at Commodity News Center. The International Energy Agency forecasts global oil demand of 83.3 million barrels per day in 2009, down 2.5 million barrels per day from 2008.
"When demand in the U.S. is off nearly 5%, China's increases don't mean much," said Bibbings. So "although it might be popular and trendy to talk about China being the 'next big thing', the reality is that the tail cannot wag the dog no matter how much it tries."
"The United States, as the dog, is still the world's largest consumer of oil by far and should hold this position for the foreseeable future," he said.
And with the scope of global economic recovery in question, oil inventories still at a surplus and weakness in worldwide oil demand, analysts say China doesn't have quite the pull on the oil markets most everyone assumes. China's oil purchases are often attributed to mere stockpiling as opposed to actual usage.
Artificial use
China has been stockpiling various commodities, buying them with stimulus cash at prices well discounted from a year earlier. That would appear to be a smart move -- but has it been for all the right reasons, and will it last?
"China is sitting on tons of cash and it would not surprise me if China got back into commodities as soon as we see a good break in price," said Phil Flynn, a vice president at Alaron Trading.
The "question is whether or not the commodity-buying surge that we have seen in recent months is sustainable," he said.
On Monday, the World Bank said the global economy will shrink 2.9% this year, worse than the 1.7% contraction it predicted in March. China's economy is built on exports and with figures like those from the World Bank, "the ability of China to continue buying commodities is suspect," said Flynn.
At the same time, the markets have been assuming that the strength in Chinese oil demand hints at an economic turnaround in the nation.
The counter argument to that points out that "talk of resumed economic growth is premature," said Darin Newsom, DTN senior analyst.
If China began filling its reserves in the fourth quarter of 2008 because of lower-priced commodities, then the news is "relatively benign," he said.
But if the U.S. dollar index rallies, sending commodity prices lower from here, it's possible that, if reserves are full and prices move below what China paid, China could look to unload some of its reserves on the market, he said.
That could send prices reeling.
Keep in mind, as well, that higher imports into China "can either be from economic growth or from crude to fill [its] strategic petroleum reserve," said James Williams, an economist at WTRG Economics.
Bibbings said China is "not really increasing consumption," referring to the nation's demand as "artificial."
It's been "attempting to hoard commodity resources through speculative buying," he said, and given that, China "will not be able to affect oil prices indefinitely."
Peeking at the future
That said, expectations for oil demand and prices appear mixed for the short term, though the consensus for the longer term overwhelmingly points to stronger consumption and higher prices.
"With oil having nearly doubled in price over the past three months, it is hard to be bullish in the short term," said Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter. And "most economists do not forecast a synchronized global recovery as major European economies are expected to recover later than the U.S."
The U.S. is still too big a consumer to ignore, and while growth in China can't fully offset U.S. weakness in the short term, Chinese demand will be a factor in oil's next move in the long term, he said.
In July, oil will likely see higher prices, said John Person, president of Nationalfutures.com. And as China supports data of 6%-8% gross domestic product growth this year, "my take is we will be seeing crude oil back closer to $80 before the summer ends."
On the other hand, Bibbings said that fundamentals, as well as excessive speculation in the oil market, suggest that crude may be "ready to turn hard between now and July" -- to trade between $40 and $55 around mid summer to early fall.
For the longer term, China still has an integral part in oil's future.
"Peak oil is still coming, and China is part of the problem," said Sean Brodrick, a natural-resources analyst at UncommonWisdomDaily.com. "Practically every car sold in that country is to a new driver -- unlike car sales in the U.S., which are mostly replacement cars."
So as far as the crude market is concerned, "the current global contraction has been a gift in disguise," said Todd Hultman, president of Dailyfutures.com. Demand may not peak again until 2012 or after, "giving the market precious time to find solutions before supply problems re-emerge."
By Myra P. Saefong
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