Faltering demand growth in Asia’s top three oil-importing nations is further hindering efforts to balance the market as a stubborn supply glut persists.
A fuel glut in China, a hangover from demonetization in India, and an ageing, declining population in Japan are holding back crude oil demand growth in three of the world’s top four oil buyers.
The three countries make up a fifth of 97 million barrels per day (bpd) in global oil consumption, and any hiccups among them will mean lower-than-expected oil demand growth in Asia, helping to undercut the OPEC-led effort to support prices.
“We are indeed seeing lower demand from more than a few clients – air, marine, road, industrial … They are actually consuming less fuel than anticipated,” said Michael Corley, managing director of Mercatus Energy Advisors.
Competing with the US as the world’s biggest oil importer, China’s May oil imports were still at a near record of 9 million bpd. But a looming cut in refinery operations is set to hit demand for crude oil in the third quarter.
Overtaking Japan as the world’s third-biggest oil importer last year, India’s crude imports fell by more than 4 percent between April and May to around 4.2 million bpd, as after-effects of the country’s recent demonetiation program hit consumption.For the first five months of the year, India’s imports are about flat to the same period last year, following an annual rise of 7.4% last year.
In Japan, Asia’s most advanced economy, oil demand has been in structural decline for years due to a declining, ageing population, and the rise of cars with better mileage or that use alternative fuels.
Japan imported around 3.5 million bpd in April, down from a peak of 5.9 million bpd hit in 2005.
Coupled with plentiful supplies, the stuttering demand in Asia has contributed to a 20% price fall for Brent crude oil to around US$45 per barrel, in what is the biggest slump in a first half of a year since 1997.
In the latest indicator of a supply overhang, traders said that five very large crude carriers (VLCCs) have been chartered in recent days to store unsold oil.Each VLCC can hold around 2 million barrels of oil, and the five chartered for storage add to around 25 supertankers already sitting in southern Malaysian waters.
In a market condition known as contango, where spot crude oil prices are cheaper than those for future delivery, it is profitable to store oil for later sales.
Ashok Sharma, managing director of ship broker BRS Baxi in Singapore, said floating storage will get more traction if oil prices continue to decline.
Spot Brent is still currently almost US$1.50 a barrel cheaper than that for delivery in early 2018 despite efforts led by the Organization of the Petroleum Exporting Countries (OPEC) to cut output by 1.8 million bpd that has been place since January. There is also skepticism that markets will re-balance soon as doubts rise over OPEC’s compliance with its own targets and soaring US output.