1 Important Development Oil & Gas Investors Should Know: China’s Drop In Oil Demand

There are many companies in Singapore’s stock market that are exposed to the oil & gas industry. As of November 2014, the count was 54. Some of the larger players in the space include the oil rig builders Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51).

The last two years have been a rough time for the businesses and stock prices of many of the oil & gas companies here given the sharp collapse in the price of oil. Right now, oil is sitting at around US$50 per barrel, a far cry from the price of over US$100 that was seen in mid-2014.

Investors who are interested in oil & gas companies may want to keep up with important developments in the industry. One such recent development concerns China.

China is not only the second largest economy in the world – with an estimated appetite of 11.64 million barrels of oil per day this year, it is also the world’s second-largest oil consumer after the United States. There are two events that could curtail China’s daily demand for oil by up to 500,000 barrels:

1. Flooding in the country

The first event would be floods that occurred in parts of the country last month. The floods had disrupted businesses and damaged oil product and gas pipelines in the affected areas; British bank Barclays expects the weather phenomenon to reduce China’s oil demand by 100,000 barrels per day.

2. G-20 Summit

The second event would be China’s hosting of the G-20 summit in Hangzhou on 4-5  September 2016.

According to a recent Bloomberg article, officials in Shanghai have ordered 255 companies, including coal plants and oil refineries, to reduce their production from 24 August 2016 to 6 September 2016. Another 445 companies in Ningbo have also been asked to cut their output or close their facilities. These 445 companies include petrochemical plants and steel, cement, and paper producers.

China’s actions are meant to clean up its polluted skies so as to give foreign leaders a positive impression of the country. Similar actions were taken by China prior to important international events held there, such as the 2008 Olympics and the 2014 APEC (Asia-Pacific Economic Cooperation) meeting.

IHS Markit, a market data researcher, expects that demand for 400,000 barrels of oil per day will be removed in China until the restrictions end.

There are ebbs and flows in the supply and demand dynamics of oil. Some have long-term consequences while some are shorter-term in nature. It looks like a big bulk of China’s potential decline in the demand for oil is of the latter variety.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.