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China and US Consumption: Role in the Crude Oil Market

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China and US consumption estimates

The EIA (U.S. Energy Information Administration) published its monthly STEO (Short-Term Energy Outlook) report on August 11, 2015. The data showed that Chinese oil consumption could rise by 0.339 MMbpd (million barrels per day) in 2016—compared to a rise by 0.330 MMbpd in 2015. Likewise, US consumption is expected to rise by 0.189 MMbpd in 2016—compared to the rise of 0.399 MMbpd in 2015. This consensus suggests that crude oil consumption is rising marginally, but consumption growth is slowing down.

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US and China imports

The US and China are the top two crude oil consumers and importers. Together, they imported more than 14 MMbpd of crude oil in July 2015. Together, they consume 30 MMbpd of crude oil. This is 30% of the global crude oil that’s consumed.

Crude oil imports from China hit record levels in July 2015. Despite the slowing Chinese economy, why did crude oil imports soar? The demand from small refineries boosted crude oil imports, according to data from the General Administration of Customs. China imported 7.3 MMbpd of crude oil in July 2015. The other reason could be that China is taking advantage of lower crude oil. It’s building massive inventories to get an advantage in the long term. The implication is that over the long term, the slowing economy and record inventory from China could slow down the demand for crude oil. This was confirmed by the stock market crash from China and devaluation of the Chinese yuan by the Chinese government.

Likewise, US inventories are at record levels. US imports could slow down due to the consensus of massive production, record inventories, and speculation of slowing demand from the US due to the mounting refined products stockpiles. This signifies that China and the US could extend the crude oil bear market unless there’s a real catalyst due to a rise in crude oil’s retail and industrial consumption.

The long-term lower crude oil prices impact US oil producers like Noble Energy (NBL), Anadarko Petroleum (APC), and ConocoPhillips (COP). Combined, they account for 7.01% of the Energy Select Sector SPDR ETF (XLE). These companies’ crude oil production mix is greater than 41% of their total production. They also affect energy ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE).

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