The most underappreciated story in the oil market oilprice.com gas density of air

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China’s oil demand growth has so far this year exceeded expectations, and Goldman Sachs, for example, says that growth could be even “higher than currently estimated”. According to Goldman, global oil demand growth in the first quarter of 2018 is likely to have seen the strongest yearly growth since the fourth quarter of 2010.

In 2017, China surpassed the United States to become the world’s top crude oil importer as its domestic production declined while it kept the title of world’s largest oil consumer for the ninth consecutive year, and while it expanded refining capacity, and reduced restrictions on oil imports and refined oil product exports.

The strong crude import pace continued this year, and in March Chinese crude oil imports hit their second-highest level on record at that time, while refined fuel exports also jumped to an all-time high, up by 43 percent compared to March 2017. China’s crude oil imports in the first quarter increased by 7 percent on the year to around 9.09 million bpd—a rise of almost 595,000 bpd on average compared to Q1 2017, according to Reuters calculations.

At the same time, China’s domestic crude oil production has been languishing near June 2011 lows in the first quarter this year, prompting higher imports to meet growing demand. Crude oil production in March was around 3.76 million bpd, flat compared with the average levels in January and February.

In April, Chinese crude oil imports set a new record—at 9.6 million bpd they beat the previous daily record of 9.57 million bpd from January this year. Steady refining margins and backlog cargoes to some independent refiners contributed to the record import volumes. Refined oil product exports soared 46 percent on the year in April, but eased from the all-time high in March. Related: Higher Oil Prices Look Likely

Iran’s oil buyers continue to buy its crude, assessing the implications of the sanctions during the 180-day wind-down period. While European buyers flag concerns over the financing issues of trade with Iran as a potential stop to buying Iranian crude, China is reassuring Tehran that it will continue to import its oil.

As a supply loss in collapsing Venezuela and a potential decline in Iranian oil exports push oil prices up, the pace of demand growth in China could drive global demand growth higher. If demand growth continues to be strong—as currently expected—an already tight oil market could become even tighter amid geopolitical concerns, driving oil prices further up.

"China should “observe developments soberly, maintain our position, meet challenges calmly, hide our capabilities and bide our time, remain free of ambition, never claim leadership. China should not attempt to be a hegemon, it should never practice power politics and it should never pose a threat to its neighbours or to world peace”.

While oil prices’ surge to $78 a barrel is underpinned overwhelmingly by the robustness of the global oil market fundamentals, a virtual re-balancing in the oil market and, to a lesser extent, geopolitical concerns, it is safe to say that China’s thirst for oil is the one factor underpinning the market fundamentals.

Since it became a net oil importer in 1993, China has greatly increased its oil imports from 20,000 barrels a day (b/d) then to 9.6 million barres a day (mbd) in April this year compared with 8.40 mbd in 2017, a 14% rise. China’s oil imports are projected to range from 10-11 mbd this year accounting for 74% of China’s domestic demand.

And while China’s fast-rising demand for oil imports is buoyed by strong economic performance, the fact that China’s domestic oil production has declined from 4.25 mbd in 2014 to 3.76 mbd in March this year gave another stimulus to China’s oil imports.

And while China’s ever-growing oil demand is a big story in the global oil market, the biggest story unfolding is the petro-yuan which could cause a seismic shift in the global oil market as it tries to challenge the petrodollar for dominance in a global oil market valued at $14 trillion. The petro-yuan will gain more recognition as the currency to undermine US sanctions against Iran, Venezuela and Russia. This is the real story in the global oil market.