The China-floating storage connection

A few weeks ago Philip Verleger argued that contango (and by extension, speculators) in heating oil had helped avoid a blowout in home heating costs during this cold, cold northern winter.

Goldman Sachs has theorised something similar may have gone on in oil markets – albeit from a completely different angle. They suggest that big floating oil inventories may have shielded the effect of rising demand from China – and that that shielding effect might be unwinding.

The drawdown in floating storage during January, analyst David Greely estimates, was fairly substantial in January [update NB that's in relation to the 5-year average, which would have been mightily increased by big builds in January 09]:

Goldman Sachs

Source: Goldman Sachs

Meanwhile the draw-down in US onshore inventories during January was fairly small. Although this is normally a month when inventories build, Goldman says the wide difference in the two measures suggests – you guessed it – China’s ever-increasing importance in worldwide oil trade:

However, the low draw on US total petroleum inventories in January does highlight once again that the principal driver of the tightening supply-demand balance is the continuing strong demand coming out of China and the emerging markets.

More specifically, China accounted for most of the recent growth in global oil demand, with Chinese oil demand growth reaching 1.3 million b/d year-over-year in December, well above our forecast of 580 thousand b/d, driven by continuing strong industrial production (IP) growth which reached 18.5%. Going forward, although we expect China’s demand growth to slow from it current torrid pace, we see a substantial risk that Chinese demand growth may outstrip our forecast for 2010. Consequently, we believe that concerns regarding a slowdown in Chinese oil demand are misplaced as we see the issue over the next several years as being one of too much oil demand from China, rather than too little, and we are maintaining our average WTI crude oil price forecasts of $90/bbl for 2010 and $110/bbl for 2011.

None of which bodes particularly well for the fragile global recovery.

Related links:

Thank speculators (and contango) for relatively low heating bills (FT Energy Source)

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