Does China need overseas oil production?

Chinese oil companies are expected to double their overseas crude oil production by 2015, according to the International Energy Agency. China's crude oil overseas production was 1.5 million barrels per day in 2011, it could increase to 3.0 million bpd in 2015.

IEA estimates Chinese firms have spent about 92 billion US dollar to invest in overseas oil field since 2009. The annual investment recorded 35 billion dollars last year and IEA forecasts the steady investment is likely to continue.

China imported average 5 million bpd of crude oil in 2011, so supply from the nation's owning oil field was about 30% of total imports during the year. How will the situation has changed in 2015?

US Energy Information Administration forecasts that China will consume 12.05 million bpd of petroleum in 2015, while its domestic output will be 4.29 million bpd. Therefore, The country will need 7.8 million bpd of imports in the year.

Based on predictions by IEA and EIA, China is expected to produce nearly 40% of its imported crude oil in its owning oil field. The ratio will be far higher than Japan which produces only about 16% of imported crude oil in its own interests.

Although Japan plans to increase its overseas production to 40% of imported crude oil by 2030 as well, Chinese are much more aggressively buying overseas interests.

However, will China need to acquire more overseas crude oil production?
The chart apparently shows steady increase of Chinese petroleum demand over the past several year besides slump in the US and Japan.

Year-on-year growth of oil demand more clearly describes it, but on the other hand the chart suggests Chinese growth is correlated with decrease in the US and Japan. Growth of energy consumption in China was caused by transfering of manufacturers from advanced nations.

Moreover, Chinese manufacturing's deep dependency on exports is causing more direct fluctuation in energy demand in line with the world economy situation than advanced countries.

Since recent increase of manufacturing costs in China and political uncertainty are triggering foreign companies to escape from the country, China should boost its domestic demand to keep steady growth of energy consumption.

However, China's situation seems not to suitable to increase middle-class people and cultivate domestic demand. Its environmental regulations are not succesfully done and rich people are rushing to send money to abroad rather than investing in their own country.

China may begin selling excess its overseas produced crude oil in the future due to the sluggish domestic demand.

Also considered another possiblity. Crude oil fields may become toxic assets in the future because of drastic change in world petroleum supply and demand caused by the shale revolution. China has been very worry about the rapid increase of petroleum dependency on imports over the past several years, so the country seems being fooled investing in the overseas oil field at higher prices....

How long will Japan bear without nuclear power?

Although most of Japanese nuclear plants are still shut, Japan seems to succeed to get over winter without nuclear power supply as same as the previous summer demand season.

It was fortunately helped by relatively warm weather in January, therefore, Japan is still not able to decide to give up nuclear units.

Electricity supply by Japanese ten major utility firms fell 1.7% from a year ago to 8.6 billion kilowatt hour, according to the Federation of Electric Power Companies. It was the first year-on-year decrease in the past three months.
Although cold weather sustained electricity demand during December, power saving directly affected demand in January.

In the Kansai Electric Power Company's business area during December, there were five days when power supply capacity were shortage if the company didn't resume two nuclear units in mid-2012. However, KEPCO's average capacity utilization in January fell 5 points from the previous month to 79%.

Average temperature in Osaka in December was 1.5 degree Celsius lower than a year ago and 2.0 degree below the 30-year average. But January average was only 0.4 degree lower from a year ago and 0.8 degree below the 30-year average. Moreover, average temperature is over the previous year level and the historical average in the first half of February.

Meanwhile, average capacity utilization of Tokyo Electric Power Company has been about 90% in the past couple of months. It was relatively less spear availability compared to KEPCO.

TEPCO's average capacity utilization during 2012 was 85.5%. The company has gotten over heat waves and cold weather without nuclear plants, but its supply capacity was critically close to the limit during the high-demand season.
The company may not be able to accommodate the possible growth of demand in case of economic recovery.

Japanese stock market has been firmer due to the positive forecasts triggered by the government's easing policies. However, the country's industrial index have not shown actual signs of recovery.
Crude oil processing that indicates energy demand has already finished the slump but has not seemed to begin rebound.

Since stock market is said to preempt the real economy, Japanese manufacturers might increase activities in the near future. Energy demand is likely to rise at that time.

Previously, it was easy to reduce electricity usage due to the industrial slump. But are Japanese utility firms able to get over the coming summer season?
Japanese manufacturers could maintain low power usage when they move factories to overseas further, but the weaker yen may inhibit it.

Since the weaker yen will lift imported thermal power fuel prices on the other hand, requests to resume nuclear plants are likely to expand in the near future.

Is China able to reduce air pollution?

Serious air pollution in China is expected to be eased during the Lunar New Year holiday week, however the smog is likely to appear frequently again after the holidays.

Chinese government is reported to introduce more strict environmental regulations ahead of the schedule due to the recent escalation of air pollution. But is it able to  reduce pollution successfully?

Current Chinese major emission regulation is called China 3 that is said to be equivalent to the Euro-3 standard. The Chinese regulation, for example, limits sulphur contents at 150 parts per million or below in gasoline and 350 ppm or below in diesel.

The China 3 regulation was introduced in 2005 in Beijing and was expanded to nationwide in 2007. Meanwhile, Euro-4 equivalent China 4 was introduced in Beijing in 2008 prior to the Olympic games. The new regulation limits sulphur content at 50 ppm or below in both gasoline and diesel.

Although the China 4 regulation was expanded to Shanghai in 2009 and to Guangzhou in 2010, other most area is still covered by the China 3.
This time, Chinese government aims to adapt all domestic petroleum fuel to the China 4 standard by the end of 2014. Also it plans to introduce China 5 standard, that limits sulphur content at 10ppm or below, in Beijing within this year and to expand to nationwide by the end of 2017.

These policies would force Chinese refineries to spend huge investment on desulphurization facilities.
Chinese domestic produced crude oil is low sulphur, but recent rapid growth of petroleum demand is lifting the nation's high sulphur crude oil imports from the Middle East.

Chinese crude oil imports have exceeded domestic production regularly since mid-2009. Surging crude oil import is in step with the country's automobile production.

The above 2 charts suggest that the increasing petroleum fuel production by using high sulphur crude oil triggered by the higher automobile output in the past couple of years is one of the main reasons of recent severe air pollution.

Chinese refineries mainly processed low sulphur domestic crude oil up till very recently. Therefore, they are unable to make clean fuels from increasing high sulphur crude oil since they have poor desulphurization facilities.

Most refineries have to invest huge amount of money. But many Chinese refineries do not have enough funds.
In China, refineries have to buy crude oil at global market prices, while domestic sales prices for petroleum products are controled by the government. So they often suffer losses.

PetroChina, the largest oil company in the country posted 23.3 billion RMB losses in its refining business in the first half of 2012. In case of rural small and medium sized refineries, the huge investment is likely to damage their balance sheet significantly.

Investments and increased costs due to the upgrading desulphurization are estimated to hike Chinese petroleum production costs by 0.12-0.15 RMB per liter between China 3 and China 4. Production costs for China 5 is higher further, of course.
Chinese government seems to consider the higher production cost, but how to and who pay the costs are still unclear.

If prices are different between grades, consumers will go to the rural area to buy cheaper fuel. Meanwhile, keeping same prices for all grades is likely to make refineries hesitant to supply high-cost fuels soon.

Anti air pollution is an urgent matter in China since the it is expanding to neighboring nations. However, Chinese people usually do not obey government order easily when it hurts their interests.

Some people in the government or major oil companies also say that Chinese emission regulation is progressing compared to other emerging. Others claim that China's current effort is enough since Europe spent more than ten years until reaching to the Euro-5 standard after introducing Euro-1.

China's petroleum sales is slump

Petroleum products sales in China is reported slump before the coming Lunar New Year holidays. Regional major suppliers Petrochina and Sinopec are reducing prices to encourage sales.

Retail petroleum prices in China are set based on international markets. Maximum wholesale prices are decided retroactively from the official retail prices. Suppliers set their prices at the maximum limit when the market is in tight, but they often cut prices in case of sales slump.

Chinese official  retail petroleum products prices are unlikely to decrease in the near term since global markets are firmer. Meanwhile, producers and dealers who have heavy stocks seems to reduce inventories with lower prices prior to the Lunar New Year holidays.

Crude oil processing by Chinese refineries in December rose 8.4% on year to the record high at 43.12 million tonnes, or 10.19 million barrels per day, according to the National Bureau of Statistics.

Although China's crude oil imports in the same month increased 8.0% on year to 23.67 million tonnes and domestic production rose 5.6% from a year ago to 17.94 million tonnes in the month, end-December crude oil stocks level was 3.6% lower from the previous month because of the large amount of processing.

On the other hand, stocks of petroleum products as of end-December increased 4.2% from a month ago. Especially, gasoline inventory gained 8.5% from end-November. Excess production against domestic demand also boosted exports of petroleum products in December to 25.2 million tonnes, 12% higher than a year ago.

Recent high petroleum products inventories at Chinese suppliers suggest that situations in January were similar with the previous month.
Or petroleum consumption tax introduced on 1st January may have been depressed the demand.

Even though economic index shows Chinese economy is recovering, fuel demand does not increase enough. Higher production based on the optimistic forecasts fueled by stronger index seems to be weighing on the Chinese petroleum market.

Does oil demand suggest Japan's economic recovery?

Forecast of Japanese economic growth in 2013 by IMF was reported recently at 1.2% on year. It was same as the previous prediction done in October. Although the stay was relatively better result than down grade in western countries, Japan's slow growth rate is still thought to weigh on global economy.

However, petroleum demand is showing sign of recovery in Japan since early December. The steady fuel demand seems to represent economic recovery.

Crude oil processing by Japanese refiners recorded year-on-year increase during April and May 2012 since those figures were compared to serious slump following the severe earthquake in 2011. But the nation's petroleum demand slipped to negative on year in June-September 2012. It posted temporary recovery in October but slipped again in November. Then, Japan's crude processing has increased on year over the past seven consecutive weeks.

Another major energy index, electricity supply also recorded year-on-year growth in November and December. Can we see that these stronger energy demands represent Japanese economic recovery?

Of course, chilly weather condition has boosted energy demand during the current winter season. The Federation of Electric Power Companies mentions  about the influence over power demand by weather in its monthly reports.

But electricity demand in the Tokyo Metropolitan area is estimated at 2.1% decline on year in the first 25 days in January. In other words, petroleum demand keeps steady growth despite slowing electricity demand in this month.
Therefore, recent increase of petroleum demand seems not only to be used for heating.

Japan's monthly average temperature in October 2012 was 0.58 degrees Celsius above the past 30-years average, according to the Meteorological Agency. Meanwhile, November average was 0.33 degrees below the long-term average and December average was lower by 1.32 degrees.

We can find that the temperature deeply affects on electricity demand, however, petroleum demand shows different movement.

Will Japanese petroleum demand fall again in the coming spring season, or continue to be firmer based on the economic recovery?

Arab Spring and crude oil prices

Algeria hostage crisis has finished with death of 23 hostages and more than 30 terrorists.
This crisis was not caused by the Algerian domestic factor. The terrorists aimed to stop French intervention into the northern Mali dispute. That means similar crisis is likely to occur in anywhere in the oil field in Middle Eastern nations that have poor security situations. Therefore the crisis supports the crude oil market.

On the other hand, the dispute in Mali is said to begin after rebels were trained practically and obtained weapons through the Libyan civil war in 2011. So the Libyan civil war caused the Algerian hostage crisis indirectly, and the Libyan civil war was triggered by the Arab Spring started in late 2010.

The Arab Spring democratic movement defeated corrupt and authoritarian regimes in Libya, Egypt, Tunisia and other Arab nations, however, those countries have not recovered stable society yet. Muslim extremists are expanding their affect in the region.

Let's take a look at crude oil price movements before and after the Arab Spring period.
Crude oil prices declined to below $40 per barrel after the Lehman shock capped the historical price surge during 2007 and 2008. Then the US quantitative easing lifted crude oil prices toward $80/bbl but the market failed to rise further.

Later, crude oil prices did not influenced much by the QE2, however, started rising in step with the Arab Spring and reached to $100/bbl when the Libyan civil war broke.

Although crude oil prices fell following the cease of Libyan civil war, the Syrian dispute and the Iran sanction have continued to sustain oil prices above $80/bbl.
Middle Eastern geopolitical situation certainly has been a more important factor for the oil market after the Arab Spring.

However, only Libyan civil war actually affected global crude oil supply significantly. Iran sanction gave buyers sufficient time to seek alternative supply, and the Syrian dispute has not hamper crude oil supply. Turmoil in Egypt or other nations also did not affect major crude oil supply stream.

We can see that even wars in Iraq or Libya did not destroy major crude oil production facilities because output in these nations rebounded soon after the cease.

An actual influence on supply by terrorists attack on each oil or gas field such as the recent Algerian hostage crisis is likely to be negligible.

We have been watching news about the Syria turmoil for long without judging the fairness. Many market participants are influenced psychologically despite the dispute does not affect crude oil supply. We might have to think why the Arab Spring has started.

US gasoline demand weakens despite firmer car sales

Gasoline stocks in the United States as of 4th January rose 4% on year, according to the data released by the Energy Information Administration. It was the highest level since February 2011.

US total petroleum supplies had been recorded 8 consecutive weeks of year-on-year increase before falling slightly in the latest EIA's weekly reports. However, gasoline supply has been decreasing on year over the past 7 weeks. Gasoline is accounted for 45% of total petroleum supply in the US.

Weekly average gasoline consumption researched by MasterCard Advisors also shows year-on-year trend since March 2011. Retail price fluctuations seem not affect on consumption at the level of over $3 per gallon. The consumption survey recorded the year-on-year increase only once during the last year.

The following chart is comparing US weekly gasoline supply and production data provided by the EIA. Production exceeded supply in the late 2000's and the shortage was filled up by imports. US imported 1.0-1.6 million barrels per day of gasoline during the period.

Then gasoline supply began to exceed production in 2010's. The quantity subtracting supply from production had been minus before 2009 and have apparently changed to plus after 2010.
US imports about 0.5 million bpd of gasoline recently, while gasoline exports are more than 0.4 million bpd.

The reason of slump in gasoline demand is of course that people are reducing driving opportunities.
Monthly automobile sales in the US were stable between 16 and 18 million units since early 2000's, according to the Bureau of Economic Analysis, but the figures dropped during late 2007 and early 2009. The sales quantities were often below 10 million units in 2009.

Meanwhile, US car sales has started recovering since Q4 2009. The latest figures posted 15.3 million units that is close to the previous level.
However, the recovering automobile sales unfortunately does little to support gasoline demand.

Higher sales of hybrid cars or fuel-efficient cars seems to limit gasoline consumption. Car owners are also changing life style after the Lehman shock.
Since steady automobile sales could not support gasoline consumption, negative prediction is likely to dominate the market in the future.

May people of the US use more gasoline again if retail prices decline to below $2 per gallon?