China oil demand growth to slow more on weak economic outlook:analysts

Singapore (Platts)--15Sep2011/512 am EDT/912 GMT

China's oil demand growth is expected to decelerate further in the third and fourth quarters, after slowing down in August, due to the combination of a weak economic outlook and a high base of comparison for the second half of 2010, analysts from Bernstein Research and HSBC said in separate research reports.

"China's August economic and energy data show, for the first time this year, consistent signs of a slowdown," analysts from Bernstein said in a report issued late Wednesday.

For the first time since April, the consumer price index declined for two straight months while the purchasing managers index remains low at 50.9, they said.

"More significantly, industrial production growth decelerated from 14% in July to 13.5% in August and power consumption growth fell from 12.6% in July to 9.1% in August," Bernstein said.

The research house pegged apparent oil demand in August at 38 million mt, an increase of 8% year on year.

It expects apparent oil demand to average 9.4 million b/d in Q3, lower than Q2, and 9.6 million b/d in 2011, based on the economic slowdown and slowing growth in car sales.

"We expect Chinese oil and power demand growth to continue to decelerate in the last four months of 2011, while gas demand will remain strong at 15% for the full year," it said.

Separately, HSBC said it forecast China's apparent oil demand growth in the August-December period to remain at the second quarter's level of around 5% year-on-year growth, owing to the combination of the weak economic outlook and the high base built up in late 2010.

"Apparent oil demand growth has eroded sharply from 13% in Q1 to 5% in Q2 and is likely to remain weak in H2 2011. Without oil price reforms, we see sustainable oil demand growth of 6%," HSBC's analysts said in the report published on Tuesday.

Diesel demand strength in the first half of the year failed to boost Chinese oil companies' bottom lines and local refining margins stood at a record low of minus $17.70/b in June, as a result of the government's price controls, the bank said.

Chinese retail prices for gasoline and diesel are regulated under a pricing system adopted by the central government in 2009.

Beijing announces the maximum retail product prices of gasoline and diesel for all provinces, and the provincial departments have the authority to determine the maximum wholesale prices for the refined products.

"With Brent at $110/b, local refining losses hit a three-year high because of [the] price controls," HSBC said.

Still, persistent inflationary pressure in China is likely to prompt the government to lower fuel prices, given crude prices have fallen back from their April highs, HSBC said.

--Calvin Lee, calvin_lee@platts.com

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