Asia's thirst for oil to surpass US in 2010

Soozhana Choi, head of commodities research for Asia at Deutsche Bank, discusses her forecasts for global oil demand growth and the impact of Asia's continued build-out of refinery capacity. 

How do you see global demand for oil developing in 2010?
We think 2010 will be the first year that non-OECD Asia's (Asia ex-Japan, ex-South Korea) share of global oil demand will be greater than that of the United States.

We forecast US to account for 22% of global oil demand this year, down 3.4% from 10 years ago, while non-OECD Asia will account for 22.1%, up 6.1% from 2001. Chinese oil demand will grow by 5%, with the rest of non-OECD Asia expected to see oil demand grow by 3.5%.

This is in stark contrast to US and European demand, which we see rising by 1% and staying flat, respectively.

According to our forecasts, oil demand growth in non-OECD Asia will account for 60% of global oil demand growth this year and 77% of total non-OECD demand growth. We think China alone will account for 32% of this growth.

While Asia's lead in global oil demand is not significant yet, we expect that given the slower pace of oil demand recovery in the US relative to Asia, this trend will persist.

What do you see as the key drivers behind oil demand in non-OECD Asia?
A key driver is of course the return to economic growth in 2009, which occurred earlier and faster in Asia than in the West. However, demand for new refinery capacity feedstock, as a result of the region's continued build-out of refinery capacity, will also account for a significant portion of demand growth in 2010.

As a region, Asia's self-sufficiency of refined products has increased substantially during the past decade -- by 11% according to our estimates. Given an unprecedented build-out in refinery capacity over the past five years, we expect Asia to become 95% self sufficient for refined products in 2010, up from 87% in 2000.

China's refinery build-out has effectively made the country self-sufficient for refined products, while India is becoming an increasingly large exporter, particularly for light products.

Along with the implementation of the second phase of China's Strategic Petroleum Reserve (SPR), we expect oil demand growth in non-OECD Asia to outperform yet again in 2010.

How do you see Chinese oil demand growth in 2010?
It's worthwhile first considering China's oil demand profile in 2009, which was notable for many reasons.

Demand growth, spurred by the central government's stimulus programme, rose 6% year-on-year, according to our estimates. While some part of this demand was inventory building, much of it was consumption by end-users -- notably in the agricultural and construction sectors -- which were key beneficiaries of the economic stimulus programme.

Also notable was that the top driver of oil demand growth was not for refined products -- such as gasoline, diesel, jet fuel etcetera -- but was instead linked to naptha (a petrochemical feedstock that is a building block for the plastics industry), asphalt (for road construction) and petroleum coke (used for the production of cement and aluminium, and for power generation).

While refined product growth was 1.2% in 2009, naptha imports in 2009 averaged 200,000 barrels per day, up from 50,000 barrels per day in 2008.

We expect this trend to switch back in favour of demand for refined products in 2010, with demand for diesel in particular showing strong growth, given its lower base in the first half of 2009, when demand on average fell 8% year-on-year.

Also important to consider is how China's buying pattern may be influenced by phase two of its crude SPR. Phase one tanks with capacity of 100 million barrels were filled in 2009, with low oil prices providing a good buying opportunity. A portion of the phase two tanks currently under construction may come on-line this year, potentially adding 45 million barrels of crude SPR capacity to be filled.

Just how significant has Asia's build-out in refinery capacity been?
Very. Asia has begun an unprecedented refinery build-out that we estimate will boost the region's capacity by 34% by 2013. In 2009 alone, 2 million barrels per day of new refinery capacity was brought on-line in Asia, half of which was built in China and a third in India.

Not only has the region become nearly self-sufficient in its ability to refine light products, but excess capacity has meant that Asia is taking an increasingly large share of the global refined product market. Also of note is the high complexity of the refineries that have been built, with a large share of this new capacity able to refine high-value light products -- such as gasoline and diesel -- using lower-priced, high-sulphur, crude oil grades as feedstock.

Part of this excess capacity has been by design, as in the case of India, where Reliance's refinery site in Jamnagar is able to produce light products clean enough to meet the stringent fuel standards of the US and European markets.

In China, export of refined products is the result of surplus from China's increasingly large refinery capacity, which was grown at a significant rate to increase energy security and meet domestic demand needs over the long term.

Utilisation rates in Asia also continue to increase, in contrast to the rest of the world. While squeezed margins saw 5% of US refinery capacity close permanently in 2009, 10% of European capacity shut for a full quarter or permanently, and 8% of Japanese refinery capacity become idle, both capacity and utilisation rates in non-OECD Asia trended consistently higher.

According to our estimates, China refinery runs in November 2009 set a new record of 8.2 million barrels per day -- a 22% gain year-on-year and a 70% gain in five years. We calculate that Chinese refinery runs were up 600,000 barrels per day, while runs in Europe and the US were down 1.3 million barrels per day in aggregate.

What impact will this excess capacity have on refinery margins?
Despite our expectation for global oil demand to grow by 1.3 million barrels per day in 2010, refinery margins will likely remain flat due to the increased capacity being brought on-line this year and beyond.

However, Asia has limited sensitivity to international refinery margins, either as a result of domestic price controls or favourable tax environments.

In China for example, product prices are regulated by the central government to ensure that domestic refiners maintain positive margins, while in India, refiners have access to cheap feedstock and favourable export tax treatment.

The difference between margins at non-OECD Asia refiners and those in the OECD is a key contributor to the divergence of refinery utilisation rates. We expect this trend to continue as non-OECD refiners pressure competition in the OECD, with production from new capacity in Asia supplying Middle East and Western markets.

As Asia's refining capacity grows, we expect this competition to intensify.