Moderate China demand seen easing oil prices, for now

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The biggest wild card on the demand side regarding oil? China, writes Marketwatch.com's Myra Saefong, whose covered the oil market for many years.

The United States remains the world's largest consumer of oil in absolute and per capita terms, according to U.S. Energy Information Administration data, but it was the emergence of China-based demand during the recent economic expansion that pressured oil's production safety cushion – and that sent shudders through those watching budgets in oil consuming companies and countries alike. Aided by China demand and a leveraging boom, oil hit the economy-stalling, truly-dizzying high of $147.27 per barrel last summer.

The China factor

What's the current low-down on 'the China factor' with the U.S. and global economies approaching recovery? Future growth in Chinese demand is not likely to offset global oil demand weakness elsewhere, notes Saefong, citing research conducted by the Commodity News Center and WTRG Economics.

China's oil demand will rise in 2009 – it was up roughly 6 percent in May on a year-over-year basis - but with U.S. demand down about 5 percent, and global demand down roughly 3 percent, China's economic performance is not likely to be enough to send oil prices galloping ahead, Saefong noted. Oil traded up 90 cents to $69.58 per barrel on Thursday at mid-day.

Further, even China's globalization era policy of stockpiling key commodities – another factor in oil's push to the stratosphere in 2008 – is not likely to spook energy traders as it did last year.

"Almost all the oil data confirms that China is not filling its reserves at the pace it did during the boom," Energy Trader Paul Schmidt told DailyFinance Thursday. "And the reason is cost. China does not want to get caught having bought oil and other commodities at a comparatively high price, in the event commodity prices decline if the global recovery doesn't start later this year."

Phil Flynn, a vice president with Alaron Trading, agreed. With China's export revenue down due to the recession, "the ability of China to continue buying commodities is suspect," Flynn told Marketwatch.com.

Hence, China's likely modest demand increases and limited stockpiling suggest Asia's largest economy will not provide the oil price bullishness that it did during 2006-2008.

Is an oil price break ahead?

James Bibbings, associate editor at Commodity News Center, is even predicting a short-term price break for oil – something that would represent decidedly good news for U.S. drivers and businesses, who have seen gasoline prices rise more than 60 percent since December 2008.

Citing oil fundamentals and speculation in the market, Bibbings argued oil may be "ready to turn hard between now and July," and trade between $40-$55 during mid-summer to early fall, Marketwatch.com reported.

Oil Analysis: At least based on current demand trends in China, it doesn't appear that every news release indicating China's monthly oil consumption rose slightly will send oil markets into a tizzy, at least for the short term. As a a result of declining demand in the developed world due to the recession, the International Energy Agency expects 2009 global oil demand to decrease by 2.5 million barrels per day (bpd) to 83.3 million bpd. So long as the developed world's consumption remains flat or in low-growth mode, price pressure on crude will be modest at best.

Long-term - post-2009 - however, the U.S. and global economic recoveries are capable of pressuring oil's safety cushion (the margin between global oil supply and demand), and that will invariably lead to prices well above $100 per barrel. Hence, at least for the United States, long-term there is no substitute for increasing vehicle efficiency, home/business conservation, and the development of alternate energy sources to reduce use of domestic and imported oil.

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