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While demand is sluggish, China will continue to drive demand in oil industry

While demand is sluggish, China will continue to drive demand in oil industry

F+L Week 2016, which is organized by F&L Asia, Ltd., kicked off today in Singapore with projections from an economist from Standard Chartered Bank, Jeff Ng, on the Asian economy and an a vice president from Moody’s, Vikas Halan, on the Asian refining outlook.

Asia is the largest contributor to global growth right now, Ng said, compared to 2000, when the U.S. and European markets drove global growth. China in particular “has always been able to surpass its growth targets,” and the percentage in growth in Gross Domestic Product (GDP) projected for China between 2016 and 2020 is 6.5%. The gap between projected and actual growth for the 2011-2015 period was relatively small at 0.8%, and the same figure for the 2016-2020 period is forecasted to be even smaller. While China is undoubtedly a driver for the Asian and global economies, Ng shared that Chinese growth has been suffering from oversupply. In the short term, Ng expects that China’s impact on the rest of Asia will be neutral.

As nearly everyone knows, the price of oil has plunged significantly in the past few years. Ng expects demand to remain more or less stable and supply to go down. His reasons include the fact that some OPEC countries are putting a hold on production. In fact, the evening before this conference began, Ng shared that oil prices had just risen above the USD 40 per barrel threshold, prompting Standard Chartered Bank to be more bullish about its projection for crude oil prices by the end of 2016 to the USD 60 per barrel range.

Halan, however, was less optimistic. He said Moody’s view is that crude oil prices will average around USD 33 in 2016, and increase about USD 5 in 2017 and 2018. Moody’s current forecast is that prices will not stabilize at USD 50 per barrel until the end of this decade. The OPEC production restrictions may not hold, he said. “We think there’s more pain to come in terms of demand,” Halan said.

The key risk going forward, Halan said, is China’s lagging demand, likely due to the same manufacturer trepidation that Ng mentioned. China represents 36% of Asia-Pacific’s demand in petroleum products.

However, Halan said, low oil prices are not always bad news for the oil refining business. Regional benchmark Singapore complex refining margins are projected to remain healthy, around USD 7 to 7.5 per barrel in 2016, compared to around USD 6 per barrel in 2013-2014. But weak Chinese demand also poses a risk for refiners as well.

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