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Crude Oil Market: Rising Chinese Debt and the Chinese Slowdown

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Chinese crude oil import 

China is the second largest crude oil importer in the world after the US. The Asian major imported 26.59 million tonnes or 6.26 MMbpd (million barrels per day) of crude oil, according to customs data. In August, Chinese crude oil imports fell by 13.40%—compared to July 2015. However, the current Chinese imports are 5.60% more than the imports in August 2014. China also has a crude oil reserve of 109 MMbbls (million barrels) as of August 2015, according to Reuters’ estimates. The slowing Chinese crude oil imports and rising inventory will put pressure on the crude oil market.

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Chinese economy and debt

The Chinese stock market collapse, currency devaluation, contracting manufacturing data, and falling corporate profits suggest that the Chinese economy is slowing. It also suggests that China could be the center of the global economic slowdown. Asian Development Bank estimates that China could grow by 6.80% in 2015 and 6.70% in 2016. However, China grew by 7.30% in 2014. Interestingly, Goldman Sachs projected that China could grow by 6.40%, 6.10%, and 5.80%, respectively, in 2015, 2016, and 2017.

China’s debt is growing faster than its economic growth. The estimates from McKinsey, a consulting company, suggest that the debt-to-GDP (gross domestic product) ratio in China rose from 158% in 2007 to 282% in 2014. The rising debt and slowing economy will put pressure on the crude oil market.

The weak demand cues will put pressure on crude oil producers’ margins. However, it will benefit crude oil refiners. This includes crude oil refining companies like Tesoro (TSO), Marathon Petroleum (MPC), and Valero Energy (VLO). Combined, they account for 7.12% of ETFs like the Select Sector SPDR Fund ETF (XLE). The roller coaster ride of crude oil prices also impacts energy ETFs like XLE and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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