China and the US to face opposing trends in demand, supply and cost structure
US crude oil imports will fall significantly from a peak of US$335 billion to US$160 billion by 2020 according to recent analysis by Wood Mackenzie. As the US dependence on oil imports continues to decrease, China's reliance on foreign oil is rapidly growing.
From 2005 to 2020, China's oil imports will rise from 2.5 million barrels per day (mb/d) to 9.2 mb/d while US imports will have fallen from a peak of 10.1mb/d to 6.8mb/d within the same period. This translates to a 360% increase in China crude oil imports and a 32% decline for US.
The oil supply growth combined with recent declines in US oil demand and a future trend of only weak growth to 2020 leads to an overall decline in crude imports through this decade. US net oil imports will decrease 45% to 6.9 million b/d by 2020 from the 2005 peak of 12.5 million b/d
Ann-Louise Hittle, Wood Mackenzie's Head of Macro Oils, says, "By 2020, US import requirements will reduce due to tight oil production while 70% of China's oil demand will come from imports. It is important to note these opposing trends, as it means the US is becoming more North America-centric for its supply needs and China more dependent on Middle East and OPEC crude. We will therefore see OPEC suppliers, who traditionally focused on the US for crude sales, compelled to shift their focus towards China."
China's demand for crude oil imports will grow significantly and outstrip US at its peak, requiring spend of US$500 billion by 2020. The turning point for US crude oil imports to be surpassed by China is expected to be around 2017.
China's growth in import demand can largely be attributed to its domestic oil demand growth, driven by gasoline demand due to the near-exponential increase in personal auto vehicles and diesel demand related to commercial trucking as China’s economy grows. Dr. Harold York, principal oils markets analyst explains, "Although lesser per capita by international benchmarks, by 2020 China will be second only to the US for the total fleet of personal auto vehicles in use. From 2005 to 2020, China will see the number of vehicles rise from 20 million to 160 million."
"China's refining structure is currently among the most complex in Asia, focused on medium-sour crude. To produce the oil products in demand, China will therefore look towards OPEC because medium-sour crude is a growing share of future OPEC supply."
As a result, between the 2005 to 2020 timeframe, OPEC's share of Chinese imports is expected to rise from 52% to 66%. Comparatively, for the US, OPEC crudes will fall to 33% of US total imports while Canadian crudes will account for 60% of US imports.
"The high cost to China for crude oil imports is compounded by the fact that China will pay a higher price for the imports relative to the US as the average price is based on a differential to Brent," says Dr. York, "China's import crude price tends to be closer to Brent than the US because of growing North America supply options. Also, the quality of the Chinese import barrels of medium crude is rising relative to the US. North American production from its tight oil plays is skewed towards light sweet crudes, leaving heavy-sour crudes a growing share of its imports, thus providing North American buyers greater discounts for imports."
"China and the US are heading in opposite directions for crude oil import trends. Although the US was the largest import market before, China will surpass US demand for oil imports and peak spend. Notably also is a change in traditional suppliers- China will look towards OPEC supply more as US relies on it less. These are trends that suppliers should look out for but equally, a trend China must consider in evaluating its cost structure" concludes Hittle.