Is China able to dominate global oil price?

Chinese crude oil futures market was earlier announced to launch by the end of this year, but currently it is expected to be started in 2013.
China aims to affect on global commodities pricing by using its own futures market. Success of crude oil futures seems to be the big milestone for the Chinese ambition.

Detailed specifications for the crude oil contract on the Shanghai Futures Exchange have not released yet. But market sources tell that the trading unit is 100 barrels, which is one tenth of WTI or Brent futures, and prices are set by every 0.1 RMB per barrel.

On the other hand, traded crude oil is estimated API 32 degree with 1.5% sulphur content. Since Chinese domestic produced oil is much lower sulphur content than that, Middle Eastern medium crude oil such as Arabian Light are likely to be the target.

Production volume of Arabian Light crude oil is over 4 million barrels per day, extremely larger than about 0.8 million bpd of Middle Eastern marker crude oil Dubai/Oman.
However, most of Middle Eastern crude oil are sold under long-term contracts, and have strict limitation to resale. Physical delivery for the futures contract may have difficulties.

Meanwhile, Chinese government has changed regulations for the futures market prior to the launch of crude oil contracts. Foreign institutions now can trade Chinese domestic futures contracts directly. Previously, foreign companies only had indirect connection with local Chinese market by capital investment.

Shanghai crude oil futures market is scheduled to provide US dollar denominated trade for foreign participants besides RMB denominated market for domestic players.

The relationship between the dollar denominated market and the RMB based market is still not clear. But supplying easy environment of arbitrage with overseas markets is quite important to activate the Shanghai market.

Daily trading volume should be recognized as more important matter. East Asia already has a Middle Eastern crude oil futures market in the Tokyo Commodity Exchange, but the Japanese market is ignored from global markets due to the sluggish trading volume.

TOCOM once influenced global precious metals markets because of large trading volume by private investors' active participation. But investors' attention has shifted from commodity futures to other market by Japanese government's regulations.

In China, many local brokers are planning to provide paper crude oil trading to investors. Those investment tools will be based on Shanghai futures market. Plenty investment money will provide good opportunities for arbitrage deals with overseas market.

If Chinese brokerage firms succeed to attract active investment into the new crude oil futures market, China is likely to have certain influence on global oil price decision mechanism. However, further economic recession and possible shrink of investment money may hamper the plan.


Further slump of Japan's energy demand

Japan's energy consumption is decreasing further. The country's industrial utilization rate has recorded four consecutive months year-on-year decrease since June, and its GDP growth rate fell 3.5% on year in the third quarter. Moreover, current sluggish energy demand suggests further slump of industrial activities.

Weekly crude oil processing data announced by the Petroleum Association of Japan is sinking deeply after the last week of October. The latest number was 8.4% decrease on year, the biggest decline since January this year.

The January change was based on comparison to the period when the severe earthquake still had not damaged Japanese economy. Meanwhile recent figures are change from post-quake crude oil processing.

Although fuel oil demand for thermal power generation has surged in Japan due to the shortage of nuclear power supply, total petroleum demand is decreasing. It means demand for gasoline, diesel and other petroleum products is significantly weaker.

Shutdowns at nationwide nuclear power plants are weighing on electricity consumption in Japan, however, fears about power supply shortage are fading after the country got over the summer without nuclear power.

Since power demand is in very low level during autumn typically, Japanese electricity consumers are able to use power without any worries. But Japan's electricity demand fell 1.8% on year in October after recorded 0.4% on year decrease in September, according to the Federation of Electric Power Companies.

Then, combined electricity supply by three major utility firms in the first half of November fell 3.0% from a year ago. Total power supply by Tokyo Electric Power, Kansai Electric Power and Chubu Electric Power accounts for about 60% of entire Japan's supply.

Current situation of energy demand seems to be realizing the predictions of further decline of Japanese GDP growth in the 4Q. Will the result of coming general election change the downward tendency?


Japan's power saving weigh on Chinese trade

China's crude oil imports in October rose 13.8% on year to 5.6 million barrels per day, according to the customs data. The country's crude oil processing in the month was 6.7% higher than a year ago and electricity output rose 6.4% on year as well. These energy related data were relatively stronger than slump during past several months.

However, Chinese energy consumption is still significantly weaker than previously recorded two digits stable growth. Current situation is no more than barely avoiding flat or minus growth.

Since year-on-year growth of monthly China's energy demand in this year have been sluggish, let's take a look at change compared to the same months of 2010.
Growth rates of crude oil processing and processing trade amount are apparently down after April.

On the other hand, Japanese data, which are confused in case of year-on-year due to the severe earthquake, also show clear downward tendency when compared to 2010.
The reason why Japan's crude oil processing rose from a year ago in June seemed to be affected by lower Chinese crude oil throughputs due to the poor refining margin.

The notable point is continuous decrease of electricity output in Japan since March. It seemed to be caused by nationwide power saving because of a lack of power supply capacity due to the nuclear plants shutdown. Japan's entire nuclear power units were shutdown in June and resumed only two later.

China's processing trade is reducing its growth pace in step with the slowdown of Japanese power output.
The processing trade, which accounts for 35% of total trade of China, is one of the major methods to earn foreign currency for the country. The amount of the processing trade was increased by 12.7% from a year ago in 2011, but the growth rate shrinked to 2.5% on year in the first ten months in 2012. The monthly growth data compared with 2010 are in relatively lower level after April.

Chinese processing trade hit all-time record in November last year and has never exceeded after that. We can't ignore influence by Japan's sluggish power consumption against processing trade in China.
Of course, weaker demand for materials, parts and machineries from China may make Japanese manufacturers easy to cut power use.

China's total trade in Jan-Oct rose 6.3% from a year earlier, according to the customs data. The number is much lower than 22.5% on year growth in 2011. Especially, trade with Japan fell 2.1% on year and trade with EU decreased 3.0% on year during the first 10 months in this year.

China's imports from Japan in October fell 10.2% from a year ago. Media explain that the conflict between both nations over islands in the East China sea is affecting on the trade. However, Japan's exports to China had already fallen 9.2% on year during Jan-Aug period before breaking out the dispute.


China's energy supply capacity is already excess?

Energy demand typically increases in the fourth quarter in China. A lack of petroleum supply caused severe turmoil in the Chinese society during the 4Q period in past two years.

However, similar supply disruption has not heard this year. Significant shortage of electricity supply capacity during demand seasons has also not been reported.

China has increased energy supply capacity since the beginning of the open and reform policy, and the adding capacity was soared in the latter half of 2000's. But the supply ability seems becoming excess already.

The following chart shows quarterly basis secondary sector industry gross domestic product and oil equivalent energy supply (crude oil processing and electricity output).

Sharp rises of GDP in the 4Q 2010 and 4Q 2011 compared to mild growth of energy supply suggest the cause of severe petroleum shortage in these periods.

Slight mismatch was also seen in 2Q this year due to the year-on-year decrease of crude oil processing during the period, but the market did not cause turmoil then.

Chinese refiners processed average 9.3 million barrels per day of crude oil during January-September this year, according to the National Bureau of Statistics. Refinery operating rates was estimated below 80%.

Chinese refineries kept their utilization rates relatively lower over the past couple of years because of unfavourable refining margins. However, the refining margin is recovering this year since the government has adjusted local petroleum prices more frequently.

Therefore, the slump in crude oil processing seemed to be caused by weak demand.
Year-on-year growth of Chinese industrial utilization rates has been below 10% since April.

China's crude oil processing capacity surged 44% between 2005 and 2010. Another 10% increase is estimated between 2010 and 2015 and further 16% growth is expected in the next five years after 2015.
But excess capacity could weigh on refiners operating costs if growth of demand is slowing.