The weak Chinese economic backdrop is unnerving oil market investors. However, Michael Tran, Managing Director, Global Energy Strategy seeks to dispel the myths and misconceptions about the relationship between oil consumption and GDP.
Chinese Oil Consumption Patterns and Pitfalls
With an annualized average oil demand growth rate of 535 kb/d, China has generated over 35% of total global oil consumption growth since the turn of the decade. However, several macro indicators point to a slowing of Chinese economic activity, ranging from manufacturing and services to real estate. The government has taken various initiatives to stimulate the economy, including tax cuts for corporates financing infrastructure projects, but this may take time to have a positive impact. Although China’s slowing growth will have negative ramifications for oil demand growth, Michael Tran believes that using GDP as the sole input for estimating demand may be misguided and that the shift in consumption patterns or the intensity of energy demand may be a better key metric.
Michael Tran, Global Energy Strategist at RBC Capital Markets, discusses the outlook of the oil market, the importance of demand and the electrification of vehicles in China.
Energy Intensity Matters
The boom years of double-digit percentage Chinese GDP growth was underpinned by strong industrial spending on roads, bridges, buildings and broad infrastructure where large amounts of distillate were required. Over recent years, slowing Chinese growth has flattened diesel demand but increased gasoline appetite, which grew at a record rate from the middle of this decade. The transition toward a consumption-based economy means the energy intensity of each vehicle mile travelled matters, says Michael Tran. Gas-guzzling SUV sales, which amounted to 7% of total vehicle sales in China at the turn of the decade, now stand at 35%. Meanwhile, the base level of annual vehicle sales has nearly doubled during that time.
The Evolving Relationship Between Vehicles and Transport Fuels
Michael Tran points out that the slowing vehicle sales last quarter point to a change in consumption potentially affecting oil demand, with electric vehicle sales nearly 2.5 times higher during the first nine months of this year vs. last year. However, air travel is surging, becoming an important structural and central pillar to Chinese oil demand growth. An increasingly affluent middle class within emerging economies in Asia should boost air travel fuel growth, especially considering two facts. First, while less than 10% of Chinese citizens have passports today, this number could double to 240 million within the next two years.
Furthermore, air travel infrastructure and connectivity is improving, with 11 new airports built recently.