Oil Prices Set for Weekly Gain on China Stimulus Optimism

Oil prices rose on Thursday, poised for a weekly gain, as traders bet that new stimulus measures announced by China would boost demand for the commodity. The rally has pushed oil indexes into record territory, with Brent crude futures and U.S. West Texas Intermediate (WTI) crude both up more than 5 percent this week.

The market moves follow Tuesday's announcement by the Chinese government of a new package of funds to go into higher pensions, medical insurance, and consumer goods trade-ins. The stimulus move is the latest in a series aimed at supercharging the Chinese economy and, like all the stimulus reports before it, suggests higher oil demand, fueling the optimism of oil traders.

"Hopes for China's stimulus measures are supporting the market," Rakuten Securities analyst Satoru Yoshida told Reuters. "Expectations that fossil fuel production and demand will expand after Donald Trump takes office as U.S. President next month are also bolstering oil prices."

Another test comes on Thursday when the American Petroleum Institute (API) releases its weekly report on U.S. crude oil inventories. Traders will be waiting to see if the official inventory report from the Energy Information Administration (EIA) confirms the decline.

The EIA data is due at 1 p.m. EST on Friday, later than normal because of the Christmas holiday. Analysts in a Reuters poll expect crude inventories fell by about 1.9 million barrels in the week to Dec. 20, while gasoline and distillate inventories are seen falling by 1.1 million barrels and 0.3 million barrels respectively.

The S&P Global Platts survey of analysts and traders showed a median forecast for a 2.5 million barrel draw in crude stocks, with a range of -4.5 million to +1.5 million barrels. Gasoline stocks were seen down by 1.5 million barrels, with a range of -3.5 million to +1 million barrels, while distillate inventories were expected to fall by 1.2 million barrels, with a range of -3.5 million to +1 million barrels.

China's demand for oil, long an important driver of global oil demand growth, slowed dramatically during January–September 2024. Between 2000 and 2023, China accounted for 50 percent of the growth in world oil demand, averaging an annual increase of 518,000 barrels per day (bpd). However, analysts expect China's oil demand will increase by far less in 2024. The International Energy Agency (IEA) now projects that the country's oil demand will grow by 180,000 bpd this year, down from the 410,000 bpd it projected in July. Similarly, Energy Intelligence now sees China's oil demand increasing by fewer than 100,000 bpd, down from the 450,000 bpd it expected in January.

This slowdown in China's oil demand growth is due to several factors, including the rise of new energy vehicles (NEVs), the expansion of China's high-speed rail (HSR) network, and a property sector slump. NEVs accounted for 38.6 percent of new car sales in China from January–September 2024, up from 31.6 percent in 2023. The IEA estimates that China would have needed an additional 300,000 bpd of oil had growth in the country's railway use facilitated by HSR investment not happened. The floor space of new home starts decreased by almost 60 percent between 2019 and 2023, negatively impacting demand for diesel, which fuels construction equipment and the transport of construction materials.

Despite these factors, China's stimulus measures are expected to provide some support to oil demand. The recapitalization of banks and interest rate cuts in China are expected to influence consumer spending on oil-related products, as these measures aim to boost domestic demand and stimulate economic growth. However, the overall impact on global oil demand and prices is likely to be limited, given the ongoing challenges in the property sector and the broader economic slowdown, as well as the shift towards less energy-intensive sectors and a preference for lower oil prices in China.

In conclusion, while China's stimulus measures may provide some support to oil demand, the overall impact on global oil prices is likely to be limited. The slowdown in China's oil demand growth, driven by factors such as the rise of NEVs, the expansion of the HSR network, and the property sector slump, is expected to continue in the long term. This shift towards less energy-intensive sectors is likely to have a significant impact on the global balance of power in the oil market, potentially leading to a reduction in China's influence as a net importer of oil and having implications for global oil prices.