Is Asia energy demand recovering?

Crude oil market is under the pressure currently because bearish forecasts about the global economy give negative prediction to the energy consumption.
However, recent data on Asian oil demand show some recovery. It seems to suggest that the growth of regional energy use is bottoming out.

India's crude oil throughput in September rose 11.4% from a year ago to 3.45 million barrels per day, according to the Ministry of Petroleum and Natural Gas. It was the biggest year-on-year growth since July 2010.

Chinese crude oil throughput also soared by 7.0% on year to 9.47 million bpd in September, according to the National Bureau of Statistics. The nation's growth rates of crude oil processing had been less than 2% or negative figures over the past several months.

Japan has recorded year-on-year decrease of crude oil throughput during July and September, but weekly data by the Petroleum Association of Japan show 1.3% gains in the first 20 days in October.

Petroleum data describe that Asian demand is rebounding from the previous downward tendency. But we need to see another key data, electricity output.

Indian electricity output in September rose 3.7% on year to 73.1 billion kilowatt-hour, according to the Ministry of Power. Only India continues positive growth of monthly power generation among Asian three large countries over the past few years.

Meanwhile, China's electricity generation in September stood at only 1.2% growth, and Japan's power output fell 0.4% on year in the month due to the nationwide power saving following the nuclear power outage.

The growth of electricity generation seems to remain in the slow down tendency.
The Indian higher crude oil demand was likely caused by on-site generation to make up for a lack of electricity supply. China's increased crude oil processing in September might be related to the raise of domestic official petroleum prices. Lower products stock caused by dealers' hoarding before price increase and better refinery margins encouraged Chinese refiners to increase their operating rates.

We may have to wait an another 2-3 months before confirming whether Asian energy demand has finished the weak trend.

NYMEX to become more local oil market

Brent's premium to WTI prices is increasing. Since NYMEX WTI crude oil prices are losing close relationship with global situations, NYMEX seems to be going to become a more local market.

The WTI crude oil prices should be higher than Brent due to its high grade, however, the American standard prices have been usually cheaper than Brent over the past couple of years.

Crude oil stocks at Cushing, Oklahoma used to have major impact to WTI crude oil prices, because NYMEX crude oil futures contracts are finally settled by physical delivery at Cushing. It has made some people to doubt the WTI's validity as an indicator price.

Therefore, some market participants recently use brent prices as the market indicator rather than WTI. Investment banks are also using Brent prices for their price forecasts.

The Brent/WTI price difference had close correlation with Cushing crude oil stocks until 2009, but the relationship has significantly changed in 2011.

Tensions in Middle East has been the major factor to decide the price differentials rather than the US inventories. Arabian Spring and Libyan civil war widen the Brent/WTI prices last year, then Iran's nuclear program and Syria-Turkey tension are supporting the recent steady premium.

On the other hand, Cushing crude oil inventory became to be able to carry to the Gulf of Mexico area after beginning of the reverse operations at the Seaway pipeline in May this year. The US Midwest crude stocks are no longer to be dead-end.

The Brent/WTI differential previously had been affected by the US domestic inventory level, but now it is largely swayed by the Middle Eastern geopolitical situation.

Middle Eastern tension is losing its influence to the United States because the US reduces crude oil imports due to increasing domestic production.
Meanwhile, the Middle Eastern situation that stimulates the Brent market also affects on Asian nations' crude oil imports significantly.

Brent prices' reaction against the Middle East tension seems not excessive, rather it is more critical that WTI prices are weakening relationship with international affairs.

China's energy use shows further slump in September

Chinese September energy related economic statistics are showing slump.

China's crude oil import in September fell 2.2% from a year ago to 20 million tonnes or 4.9 million barrels per day, according to the General Administration of Customs. It was an another year-on-year decrease following August.

China was estimated increasing extra crude oil to fill the new strategic petroleum reserve facilities during the first half of this year. After completing the stockpile, crude oil imports for real demand show such sluggish figures.

Crude oil imports in the China in the first nine months rose 5.5% on year to 200 million tonnes, according to the customs data. However, the growth rate would be only 0.6%, if deduct the 80 millions barrel of strategic reserve amount from the total number.

On the other hand, State Electricity Regulatory Commission announced that China's electricity supply in September was 394.5 billion kilowatt-hour, rose only 2.2% from a year earlier.

The SERC's data showed the country's power supply increased 5.5% during first 6 months in this year to 2.37 trillion kWh, then rose 4.5% on year to 45.4 billion kWh in July and up 3.6% from a year ago to 44.5 billion kWh in August.

China's year-on-year growth of power supply was two digits last year. The growth of the electricity demand is apparently slowing down month by month.

Meanwhile, the sluggish tendency did not accelerate in September. It suggests the nationwide anti-Japan campaign did not affect entire Chinese industry significantly.

Dull exports lead China firms compete in limited local market

Chinese government recently announced to encourage exporting firms to develop domestic sales channel due to slump of processing trade activities.
However, current energy consumption figures in China suggest that the domestic market is not enough active to absorb supply from exporting companies.

Chinese processing trade companies are located in the bonded area. They import parts and materials from overseas without tariff, and their products are basically exported. Those companies have contributed China to earn huge amount of foreign currencies since the reform and open policy.
Processing trade companies should be licensed from the government when they wish to sell their products directly into the domestic market.

Chinese government deregulated the rule of domestic sales license for part of excellent processing trade firms in 2009 following the severe slump of exports due to the Lehman shock. This time, general processing trade companies are also encouraged to develop domestic markets.

China's processing trade amounts were 112.6 billion US dollars in August, according to the General Administration of Customs. It was 2.2% lower than the same month a year ago. Processing trade had already recorded year-on-year decrease in July.

Chinese processing trade had grown by two digits except for the slump period after the Lehman shock, but the growth rate has faded since 3Q 2011 after the Chinese yuan became stronger than the $1=6.4 yuan level.

Japan's exports, that is the typical supply source for the Chinese processing trade, also peaked out in late 2010. Although Japanese exports had strongly correlated with Chinese exports, those two numbers has been deviating especially after the Japan's severe earthquake in March 2011.

While growth of processing trade is fading, China's total exports continue moderate growth due to the relatively firmer general trades. Some people believe that the growth of general trades suggests that Chinese industrial activities are shifting from the subcontract of foreign companies to mature local industry. Those people anticipate consumption of the domestic Chinese people is also growing.

However, the growth of energy consumption apparently shows actual slowdown of industrial activities in China. Growth of exports including the general trades is also under the shrinking tendency.
If Chinese domestic demand is expanding despite the sluggish growth of exports, energy consumption is likely to maintain steady growth. Therefore, it is natural to think the Chinese domestic demand is not strong enough at moment.

If many exporting companies rush into the limited domestic markets, intense competition with local firms might hurt strength of the entire Chinese manufacturers.