China's apparent oil demand rose 5.3% year on year in the first two months of 2017 to 11.65 million b/d on the back of robust economic growth, holiday transportation demand and efforts to build stocks ahead of the refinery maintenance season that started in March.
Oil products across the barrel witnessed year-on-year demand growth over January-February, with LPG witnessing strongest growth of 24.8%, while gasoil demand rose 0.4%, rebounding from year-on-year declines since December 2015.
China's industrial production grew 6.3% on year over January-February, beating expectations of 6.2% and accelerating from 6% in December. Fixed asset investment grew 8.9% in the two-month period, accelerating from 8.1% in December, according to data from the National Bureau of Statistics.
These factors helped to lift gasoil consumption in the transportation and construction sectors. The week-long Chinese New Year holidays also pushed up demand for transportation fuels gasoline and jet fuel.
A significant proportion of oil products also flowed into storage. Stocks, comprising gasoline, gasoil and jet fuel/kerosene, rose 15.29% month on month at the end of February, after rising 10.3% at the end of January, inventory data released by state-owned news agency Xinhua showed.
Therefore, analysts do not expect the strong growth in apparent demand to continue in coming months because of the anticipated de-stocking activity that might take place.
"The heavy maintenance in March will draw down China's throughput, resulting to lower apparent demand," said a Shanghai-based analyst.
Beijing does not release official data on oil demand and stocks. Platts calculates apparent or implied oil demand by taking into account official data on monthly throughput at Chinese refineries and net product imports.
China's GDP growth is expected to slow to 6.5% in 2017 from 6.7% last year, according to Primer Minster Li Keqiang, indicating slower growth in energy demand as the country steps up efforts to lift energy efficiency.
GASOIL DEMAND EDGES HIGHER
China's apparent gasoil demand rose to 3.41 million b/d in January-February, edging up 0.4% year on year.
If additional supplies from the blending pool with light cycle oil are also taken into account, demand would work out to be 3.63 million b/d, up 2.2% year on year, calculations by S&P Global Platts showed. The barrels blended from LCO are used mainly in the construction and fishing sectors.
Despite healthy year-on-year growth in gasoil demand in January-February, consumption was softer than in previous months because of a slowdown in activity in industry, construction and fishing sectors around the Chinese New Year holidays.
"Sales of gasoil in January and February were significantly down from November and December due to the holidays," said a source with PetroChina's sales arm in southern Guangdong.
As a result, gasoil stocks surged 29.7% month on month by the end of February, after rising 39.2% by the end of January, according to data from Xinhua.
Analysts expect gasoil demand to remain steady in coming months.
"Demand from the construction sector will fall as many key cities in China recently imposed restrictions on property buying. This will lower cash flows for new construction," the Shanghai-based analyst said.
Hou Rui, an analyst with S&P Global Platts China Oil Analytics, said demand from spring ploughing and infrastructure construction would recover in Q2 when it is warmer. This might offset the slowdown in demand from the construction sector.
GASOLINE GROWTH MODERATES
Apparent demand for gasoline stood at 2.88 million b/d in January-February, representing year-on-year growth of 2.8%, compared with 8.3% growth over the same period in 2016.
Similar to gasoil, blending pools also played a role in overall gasoline supplies. If mixed aromatics inflows are taken into account, apparent demand growth would work out to be 9.2% year on year, to as high as 3.78 million b/d. Gasoline stocks rose 2.2% month on month by the end of February after dropping 11.8% by the end of January.
Analysts expect demand growth to slow because of weaker growth in car sales on the back of relatively higher taxes this year compared with 2016.
Over the first two months, gasoline-fueled vehicle sales rose 6.5% year on year, compared with 14% year-on-year growth seen in 2016, data from the China Association of Automobile Manufacturers showed.
LPG, NAPHTHA DEMAND GROWS
Apparent demand for LPG rose 24.8% year on year to 1.67 million b/d over January-February on the back of robust appetite from the petrochemicals sector.
In addition, demand from industrial users is also expected to grow sharply this year because of tighter environmental regulations. LPG is a cleaner alternative to coal and fuel oil.
Apparent demand for naphtha grew 8% year on year to 1.04 million b/d over January-February, below the average growth rate of 9.9% in 2016.
Naphtha is not only used as a feedstock to process or blend gasoline but is also used to produce ethylene and other petrochemicals. Asia's ethylene market has been gaining strength since mid-January, driven by strong spot demand, especially from China, Platts reported earlier.
Asian naphtha prices hit a 19-month high in mid-February, reducing some buying interest from China.
JET, FUEL OIL DEMAND SURGES
Apparent demand for jet fuel surged 16.9% year on year to 820,000 b/d in January-February on the back of strong demand during the golden week holidays. Over the first two months in 2016, demand had fallen 3.5% year on year to 701,000 b/d, below the average of 754,000 b/d for the whole of last year.
Aviation traffic turnover in January jumped 13.6% year on year, latest data from the Civil Aviation Administration of China showed. It was also higher than the 12.8% growth in the whole of 2016.
Meanwhile, jet fuel stocks fell 1.36% month on month by the end of February, after climbing for three months, suggesting most of the output and net imports were consumed instead of flowing into tanks.
Demand for jet fuel is unlikely to see similar growth in Q2 compared with Q1. "But it will still be buoyed by travel demand during the short public holidays such as Tomb-sweeping Day in April and Labor Day in May," said a Beijing-based analyst.
The growth in apparent demand for fuel oil turned positive for the first time since February 2016, rising 4.9% year on year over January-February to 749,000 b/d. The rise was mainly attributed to the 8.7% growth in domestic output.
Market sources said bunkering demand was weak compared with December because of slow industrial activity during the holidays, but had recovered significantly by H2 February, driven by demand for shipping coal.