Economic activity has a strong relationship to fuel demand. Therefore, economic growth and activity worldwide has a strong influence on oil prices and China in particular is a major driver of economic growth. Therefore, many market participants monitor developments in the Chinese economy as a factor in crude oil prices. The Energy Information Administration (EIA), a US government agency, notes, “China’s strong economic growth has recently resulted in that country becoming the largest energy consumer and second largest oil consumer in the world. In addition, China’s rising oil consumption has been a major contributor to incremental growth in worldwide oil consumption.” Thus, China’s economic activity affects oil demand and consequently, oil prices and earnings for oil producers such as ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP), and Hess Corp (HES).
On February 7, China reported that exports in January 2013 grew 25.0% year-over-year compared to a survey of economist estimates of 17.5% growth. As seen in the above chart, this was the highest year-over-year growth in exports since April 2011, and a strong indicator for China’s economy.
The below graph charts non-OECD economic growth versus fuel consumption (note that OECD stands for Organization for Economic Cooperation and Development and the OECD generally represents developed economies, therefore non-OECD countries are generally developing economies).
The chart displays that economic growth and fuel consumption are clearly linked, and the EIA states, “Current and expected levels of economic growth heavily influence global oil demand and oil prices. Commercial and personal transportation activities, in particular, require large amounts of oil and are directly tied to economic conditions. Many manufacturing processes consume oil as fuel or use it as feedstock, and in some non-OECD countries, oil remains an important fuel for power generation. Because of these uses, oil prices tend to rise when economic activity and in turn oil demand is growing strongly.”
The recent economic data out of China seems indicative that Chinese fuel consumption growth will also be strong. Increased demand from China provides support to oil prices, which is a positive indicator for oil producers such as XOM, CVX, COP, and HES. Additionally, this is positive for ETFs such as the Energy Select Sector SPDR (XLE) which contains a wide selection of stocks involved in the development or production of energy products.