To explain oil's resilience, we analyse different aspects of China's oil product demand and explore the distinct drivers.
In the first half of 2015, China's official GDP growth came in on target at 7% year-on-year. However, with the government intervening in equity markets, devaluing the currency and slashing interest rates to support short-term growth, there is a perception that this figure is masking a sharper slowdown in the real economy.
Indeed, our China Activity Index – which has proven to be better proxy than headline GDP for commodities – reveals that the demand outlook for 2015 is looking bleak for coal, power, natural gas and diesel.
But, while demand across these commodities stalled in the first half of 2015, oil has remained resilient. So how has the demand growth momentum for oil been maintained?
Analysing each oil product and exploring the drivers for each product, we find that gasoline, aviation fuel, and chemical feedstock related products such as LPG and naphtha are expected to grow robustly due to China's growing need for consumption-oriented products.
Specifically, we estimate that around 90% of oil demand growth will stem from consumer-related oil products this year, underpinned by rising household income and urbanisation. China's growing middle class will drive the demand for consumer related oil products – of that there is no doubt.
Notably, we have seen growth in air passenger traffic expand at a pace of almost 15% in the first seven months of this year compared to the same period in 2014. As such, our view of jet fuel remains optimistic and demand is expected to expand just over 13% through the rest of 2015.
We believe modest oil product demand growth is the 'new norm' for China as the economy rebalances away from investment-led growth towards consumption-led growth.
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