China’s Domestic Growth To Fuel Gulf Oil Demand

Despite fears of a China slowdown, long term urbanisation will spell growth, says Chris Tedder, research analyst at FOREX.com

As the Chinese structural changes begin to take place there will be resurgence in demand for oil from countries in the Gulf in the long term.

With the European economies fighting recession and the American economy looking stagnant, China’s relationship with GCC oil producing countries will flourish as it increases its share of purchased oil. This bodes well for nations such as Saudi Arabia, now the world’s largest producer of oil, which will benefit directly from Chinese income.

Recent official figures from China continue to show signs of a slowing economy as GDP growth slowed to 8.1 per cent in the first quarter of 2012 compared to 9.7 per cent in the year before.

Most analysts had predicted that the economy would bottom out during the second quarter before rallying back in the last six months of the year, however, April figures suggest that China’s industrial growth continues to slowdown, standing at 9.3 per cent compared to 14.8 per cent in May last year amid surprisingly weak consumer spending. Imports of crude fell 2.3 per cent from March, while daily crude runs at refineries are at their lowest since October 2011. However, there is a new hope on the horizon as the Chinese government attempts to shift a largely export dependent economy to focus more on domestic demand and consumer spending for its growth.

The government has taken action during the past six months to curb inflation and prevent the economy from over-heating after an infrastructure binge followed generous credit lines during the financial crisis. While still comparatively lower than previous years, the economy remains robust and the focus on urbanisation and domestic growth is very likely to be a key driver of economic growth, something that is most likely to come into play and take a prominent role towards the end of this year.

As this new direction unfolds, China’s appetite for oil will recover to meet its increasing energy requirements. To visualise the scale of this new opportunity for sustainable growth and energy demand we need to consider that by 2025, China is predicted to have 350 million more people in its cities. By 2030, 221 cities will have more than one million people, whilst Europe will only have 35 cities of that size. That means around 40 billion square metres of office space will need to be built the equivalent of an area twice the size of Wales.

This shift in emphasis will be on more sustainable growth; advanced and technologically focused, rather than one driven by sheer population numbers and its export market. As the country prepares for a change in leadership amidst slowing demand for its goods from the faltering economies of Europe and USA, Wen Jiabao and his heir apparent, Xi Jinping may focus on stimulating domestic demand and urbanisation to drive its economic growth. Xi Jinping has already expressed his “appreciation” of the private sector which is likely to benefit from this shift.

Whilst Chinese domestic growth and urbanisation won’t drive high oil prices in the short term, increased demand could drive long term growth towards the latter quarter of the year.