Credit check

Author Ben Winkley

The oil market has been fixated on Opec of late, with newly-loquacious oil ministers’ every utterance pored over.

The oil market has been fixated on Opec of late, with newly-loquacious oil ministers’ every utterance pored over.

But the exporter body isn’t the only organisation with a key role to play in balancing the market. The People’s Bank of China is Opec’s mirror on the demand side, and the producer countries will be hoping it is up to the task.

BP, in its Energy Outlook published this week, said that all of the demand growth for oil in next 20 years comes from emerging markets, with China accounting for half.

The Middle Kingdom is already a black hole for crude, with storage being built and filled while global prices are low. Aggregate crude imports, apparent demand and refinery runs all hit record levels in December.

Sure, China isn’t the only game in town right now: India is also stocking up, and its crude imports hit a record high in November and its refinery runs did likewise in December.

But India isn’t tied to the global oil market in quite the way China is. India sources crude from a comparatively narrow slate of buyers, with half the total coming from Saudi Arabia, Iraq and Iran.

By contrast, crude makes its way to China from all corners (LOCKED LINK), including recently the US from where Unipec loaded a 2mn bl cargo of WTI in late November.

This insatiable demand is fuelled by 6.7pc annual GDP growth. But this in itself is causing concern, especially around how much of this is fuelled by credit.

Ratings agency Fitch Ratings says this large debt burden will translate into substantially slower economic growth by the end of the decade, while M&G Investments says “history shows that banking crises are usually preceded by a large and quick build-up of credit in the private sector”.

“That debt is rising much faster than output year after year… means misallocation of resources [that] will depress long-term productivity and economic growth,” Swiss bank UBS says.

That’s the same long-term economic growth that will fuel half the global demand growth for oil between now and 2035.

That is something approaching a systemic risk, and puts Opec’s short-term market management moves into perspective. As the oil analysts at UK bank Barclays noted this week, demand-side risks are far more important, and possibly more permanent, than temporary Opec fluctuations.