COLUMN-Weak China oil demand contrasts with recovering economy: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
SINGAPORE, Sept 11 (Reuters) - The market view on China has shifted to one of economic recovery, built on the back of a string of stronger data outcomes, but imports and consumption of crude oil aren't fitting neatly into this narrative.
The weakness in August's oil imports has largely been attributed to a correction after July's record, coupled with maintenance of more than 600,000 barrels per day (bpd) at refineries.
There is no doubt that these are indeed factors, but the ease in explaining away August's numbers because of temporary factors may be missing a broader trend.
China imported 21.43 million tonnes of oil in August, the lowest monthly total since September last year.
Imports were equivalent to 5.05 million bpd, down from July's record 6.15 million, and also below the 5.35-million average over the first eight months of the year.
And it's not just crude imports that stand at odds with evidence of an improving economy, with implied oil demand dropping to a one-year low and refinery runs the third-weakest in the past 12 months.
Implied oil demand, which is calculated by adding refinery throughput to net fuel imports, dropped to 9.38 million bpd, down from 9.77 million bpd in July.
Refinery runs were 9.36 million bpd, down from 9.49 million bpd in July and also lower than the 9.49 million bpd over the first eight months of the year.
These numbers look out of place with the increasing strength of the economy in areas that would normally be expected to result in higher fuel demand.
Industrial production rose 10.4 percent in August from a year earlier, the fastest pace in 17 months, while retail sales grew 13.4 percent, the fastest pace this year.
Vehicle sales increased 10.3 percent in August from a year earlier, taking year-to-date growth to 11.8 percent, well ahead of the forecast 7 percent growth the auto industry forecast at the start of the year.
So, how best to reconcile the weak oil import and demand numbers with an improving economic backdrop?
The first stop, whenever looking at China's oil market, is inventories, as this is the one piece of the puzzle that isn't disclosed by the authorities.
It's likely that fuel stockpiles were used in August, partly explaining the weakness in implied demand.
While overall levels aren't disclosed, the official Xinhua news agency's China OGP publication reported that commercial fuel inventories dropped 5 percent in July over the previous month, and this drawdown may have been repeated in August.
Another factor influencing implied oil demand was the sharp drop in net fuel imports, which were a mere 18,000 bpd in August, down 93 percent from July and 16.3 percent over the first eight months of the year.
The decline in net fuel imports is now an established trend as Chinese refining capacity additions run ahead of demand growth, meaning refiners either have to run plants at lower rates, which isn't ideal for the new, complex units, or export surplus products.
China is also making moves to allow the small refineries, known as teapots, to import crude directly, a change that may cut imports of the fuel oil these plants relied on previously.
There is now a clear trend to lower net fuel imports, and if the current dynamics continue, China may emerge as a net fuel exporter, joining an increasingly crowded market in Asia for refined products.
India, Japan, South Korea and Singapore are all major exporters of products and the region is also set to get supply from the new refineries coming on stream in the Middle East.
China's refinery building programme should see it maintain surplus capacity that may well end up as fuel exports.
In theory, this should boost China's oil imports as crude is shipped in, refined and exported as products.
However, it also appears that China's crude import growth is on a slowing trend, rising only 2.9 percent in the first eight months of the year from a year earlier.
This isn't necessarily a surprise - as the economy matures it will use less fuel per unit of economic output.
But it also doesn't mean that crude imports are likely to remain subdued in coming months.
The stronger economy will eventually increase demand, as will the commissioning of new refinery units in the fourth quarter.
Some of the weakness in oil imports can be explained by the boost in domestic oil production, which has averaged 4.16 million bpd for the first eight months of 2013, an increase of almost 4 percent on the same period last year.
But it also seems clear that China's oil demand may disappoint this year, and crude imports may struggle to grow much more than 4 percent in 2013, well below the 6 percent achieved in 2012 and 5.5 percent recorded in 2011.
The unknown is what the Chinese do with inventories, but given the current high price of oil it's more likely they will draw on stocks rather than import more to build them up.
(Editing by Clarence Fernandez)