Weaker price shows further slump of China oil demand

Petroleum products demand in China seems to be worse.
Media report that wholesale prices of diesel oil in fifteen provinces and major cities are slipped from the official limit level.

In China, domestic retail petroleum products prices are decided by the government based on international market prices. Wholesale prices and refiners' sales prices are set on the basis of the official retail prices.

Previously, supply of petroleum products could not catch up with the rapid growth of demand, thus wholesale prices were usually stayed at the high limit level. Even higher prices were accepted among buyers in the black market.
Diesel oil is the most popular petroleum product in China. The fuel is used for agriculture, fishery, transportation and on-site electricity generation. A lack of diesel oil supply caused turmoil in the market during 2010.

However, the petroleum demand in China are weaker since the beginning of this year due to the lower rate of economic growth and the strict regulations over the real estate market. China's diesel oil production in March was at 14.1 million tons, only 2.0% increase from a year ago, according to the National Bureau of Statistics. The year-on-year growth was 9.3% in March last year and annual growth rate in 2011 was 5.4%.

China's domestic diesel oil sales in the first quarter 2012 was flat from a year ago, according to the National Development and Reform Commission.

Chinese refineries have suffered losses because local petroleum products official sales prices could not catch up with higher international crude oil prices since early 2011. They were hesitant to increase production but any significant shortage of petroleum products have not been reported. It also suggests sluggish demand.


Does China's crude oil futures succeed?

China Securities Regulatory Commission recently announced to launch the domestic crude oil futures by the end of this year. The authority hopes to make the futures market to be the global crude oil price index which allows China taking advantage to set oil prices.

The authorities have not decided which type of crude oil will be traded yet. They may choose domestic produced crude oil. Alternatively may select middle eastern oil, since more than half of China's crude oil imports are coming from the region.
Also the Chinese crude oil futures contracts may be traded in US dollar. The authority seems to think influence on international markets is much more important than usability for local Chinese players.

Commodity futures in China started in 1990. The first futures market was set up in Zhengzhou to trade grains. Then large number of futures markets and brokers were appeared during the first half of 1990's.  Because unregulated rapid expansion of Chinese futures market caused confusion, the government regulated the market strictly after mid-90's.
Currently, about 25 commodities futures are traded at three exchanges in Shanghai, Zhengzhou and Dalian following the consolidation.

Since industrial products such as non-ferrous metals and natural rubber are traded in Shanghai Futures Exchange, crude oil is likely to be launched there.
The following table shows annual trading volume in each futures exchanges. Trading volume of CME Group that holds CME and NYMEX is much greater than any others, but Shanhai market has already exceeded ICE that has Brent crude oil.

Chinese market was rapidly expanded during 2009 and 2010 when huge amount of speculative money due to the quantative easing flowed into the country's commodity futures.
However, Chinese government increased trading commissions, margins and trading size of contracts in November 2010 to cool down the market. Trading volume in 2011 shrinked to about half of the previous year's level following the regulation.
Even if the trading volume declined, Chinese markets still have huge transactions and the nation's increasing commodity demand keep global market players' eyes into China's futures market.

Meanwhile, arbitrage between China's futures markets and overseas markets is difficult due to strict regulation on currency exchange.
A lack of arbitrage impair price linkage between Chinese market and international markets. But it also means speculative turmoil in the Chinese market does not affect international markets directly.

The Chinese crude oil futures market is likely to be the domestic index since big state-owned firms like PetroChina will use it.
Gigantic trading volume will attract global market players eyes. Thus price movement in the Chinese market may affect global crude oil prices.
However, the limited overseas participants and the lack of arbitrage may prevent China's crude oil futures from being global price index.


China diesel oil demand slows clearly

Diesel oil demand in China seems to be declining.

Diesel oil is the most intensive petroleum fuel in China. The country's diesel oil production is almost double of gasoline. Gasoline production is almost equal to diesel oil (gas oil + A fuel oil) in Japan. Middle distillate output in the U.S. is about half of gasoline.

Diesel oil is used for transportation, agriculture, fishery and electricity generation etc. in whole over China. The country's apparent diesel oil demand in February was 14 million ton, according to media reports. The volume rose only 5.2% higher than a year ago, while 5.1% lower from the previous month.
Number of days in February are less than January, but there was Lunar new year holidays in January.

China's diesel oil production during January and February was 478,000 ton per day, rose 0.8% from December, according to the National Bureau of Statistics.
Meanwhile, industry sources said that the country's diesel oil stocks as of the end of February rose 12.3% from a month ago.

Moreover, industry sources estimate that China's apparent diesel oil demand in March decreased by 6.4% from the previous month.
Since diesel oil consumption by farmers is very active in early spring, the lower demand suggests significant weak demand from transportation and industrial sectors.

The National Bureau of Statistics also announced earlier that China's January-February electric power generation was 719 billion kWh. The figures was 7.1% higher than a year ago, the first single digit year-on-year growth after 2009.

Recent energy consumption suggests that China's economic growth is slowing apparently. Is Chinese economy able to soft landing?