Preliminary data released yesterday shows China’s crude oil imports for August sharply down 0.8mmb/d MoM (-16%) to just 4.3mmb/d – their lowest level in nearly two years. This might imply sharply weaker demand for crude in August per the crude side calculation methodology (net crude and product imports plus domestic crude production), which would be confirmed later in the month on the release of further data. Stable MoM domestic production would result in a 12% (-1.1mmb/d) MoM drop in demand to 8.3mmb/d. This would also mark a recent record-low. On the other hand, implied demand calculated under the refinery side methodology (net product imports plus refinery throughput) has implied demand falling just 3% (- 0.3mmb/d) MoM to 8.9mmb/d. In either case, Chinese implied demand for oil appears weak, with YTD growth averaging just over 2% YoY, we estimate.
The reported drop in crude imports is in line with our view that the filling of new-built strategic inventory is likely to have been completed in 1H12. That would be suggestive of circa 0.4-0.5mmb/d of crude without a firm market prospectively. Given the current fundamental oversupply of the market, that might weigh on oil prices.
In our view, current crude prices are elevated largely as a result of tension and rhetoric in the Middle East. Israeli Prime Minister Netanyahu has been pressuring the international community for “a clear red line” over Iran’s nuclear programme and US Presidential candidate Mitt Romney has branded the issue as US President Obama’s “biggest failure”. However, the US administration has resisted calls for a tougher stance, with Secretary of State Hillary Clinton stating that the approach of sanctions and negotiation is the best course of action and refusing to set any deadlines. Meanwhile, Saudi oil minister Ali al-Naimi was quoted yesterday stating “The price of oil is simply not supported by market fundamentals.” We agree with this view, especially given the expected ramp-up in supply in 4Q12. Talk without action is unlikely to be able to maintain elevated prices for too long, we believe.