China exacerbated the upswing in the commodity supercycle, but also indirectly sowed the seeds of its bust.
Expectations that immense growth in China's demand for raw materials would continue in perpetuity, coupled with the prevailing low interest rate environment, fostered a wave of capacity increases across the commodity space. The global economy is now grappling with the deflationary forces stemming from this state of oversupply.
Deutsche Bank AG Analyst Michael Hsueh brings some sobering news on this front for oil bulls: projected Chinese demand growth is still too high.
China has accounted for over one-third of the growth in global oil demand since the dawn of the new millennium, the analyst notes, a trend that the likes of the Energy Information Administration, International Energy Agency, and BP PLC still believe will continue through 2035.
While demand for oil in the world's second largest economy responded in textbook fashion to low crude prices in 2015, the medium-term assumptions by these major associations and companies entail that the Chinese consumer guzzles gas at a rate that is likely unattainable, according to Hsueh.
"We believe that oil demand growth from the passenger vehicle sector, which has made up 66 percent of Chinese total oil demand growth since 2010, may slow in the medium term and then begin to decline by 2024," he writes. "This casts doubt over the capacity for continued long-term oil demand growth at current trend rates in China, and by extension, the world."
As such, oil demand growth from the world's second-largest economy could be cut in half from 2016 to 2020, he warns.
Growth in oil demand for passenger vehicles is a function of the number in use, distance traveled, and changes in fuel efficiency. BP's assumptions on the increase in fuel efficiency are far too low, while the EIA's implied estimate of demand growth for transport not linked to passenger cars is unrealistically high, Deutsche Bank asserts.
Hsueh believes the International Energy Agency's estimate for total oil demand growth from China is likely to be closest to the mark. However, China doesn't look on pace to be wealthy enough to meet the IEA's projected growth in passenger light- duty vehicles from 61 million in 2010 to 430 million in 2035, according to the analyst, which would entail a ratio of 305 passenger vehicles per 1,000 people.
"Versus the historical precedent of Korea, this represents an aggressive rate of ownership growth," he notes. "If we consider that China 2035 GDP per capita is expected to reach $10,361 ([in] 2005 dollars), this means that China would achieve the same level of vehicle ownership that Korea achieved in 2003 at a much higher GDP per capita of $17,214 (2005 dollars)," he writes.
Reaching a plateau in Chinese oil demand growth on an earlier timetable would fundamentally change the game for the market as a whole.
"All else remaining equal, this could result in world oil demand growth falling from its 2000-2016 trend of 1.1 million barrels per day year-over-year to only 800 thousand barrels per day year-over-year by 2024," the analyst calculates.
The proliferation of electric vehicles is not a central tenet of Hsueh's thesis, though it would exacerbate the extent of any slowdown in China's oil demand, and the world's at large.
All eyes have been on supply amid the prolonged period of softness in commodity prices, but as soon as the oil market regains some semblance of balance, Hsueh predicts that demand will be in the spotlight going forward.
"In the context of today’s producer struggle for market share and process of fundamental rebalancing, there are risks that the end of the current phase of oversupply may be followed by the beginning of an emerging period of weaker demand growth, thereby limiting oil price gains above equilibrium in the longer term," he concludes.