Premier Li Keqiang's 7.5% GDP growth target
During his 1st press conference after being appointed Premier of China, Li Keqiang was asked about his top three priorities: 1) maintain economic growth of 7.5%; 2) improve peoples' livelihoods; and 3) ensure social fairness. In elaborating on points 1 and 2, Premier Li cited “economic growth” at least a dozen times, while referencing the environment just once. Li Keqiang's priority was laid bare in his press conference. Nonetheless, Li's 7.5% pa growth target is still a hefty 25% lower than his predecessor's +10% pa growth target. From 2002 to 2012, the price of crude oil surged as China elbowed its way into the global oil trading system. We suspect that China is now well entrenched in the world's oil trading system and that the country's to be engineered GDP slow down will keep global oil prices “flat-to-down” over the coming years and consequentially in-line with current DB forecasts (Figure 1).
China's demand for oil and oil products – to slow down
We forecast China's demand for oil and oil products to slow 2011-16e, relative to 2006-11. From 2006-11, China's demand for oil grew at a 6.4% CAGR. For 2011-16e, we estimate that China's demand for oil will grow at 5.7% CAGR. From 2006-11, China's demand for diesel grew at a 7.2% CAGR; for 2011-16e we estimate that China's demand for diesel will grow at 6.6% CAGR. From 2006-11, China's demand for gasoline grew at a 7.9% CAGR; for 2011-16e we estimate that China's demand for gasoline will grow at 6.2% CAGR. Fuel oil and LPG consumption have slowed already due to hefty increases in China's natural gas consumption. For purposes of stock selection, we prefer special situations to oil price exposure: capacity growth, policy reforms and / or corporate restructurings. Reliance (Buy), ONGC (Buy), Sinopec (Buy) and Huchems (Buy) all tick at least one of these non-oil price triggers.
Eoin Treacy's view At Fullermoney we have stated that unconventional oil and gas are game-changers for the energy sector since at least 2010. This is primarily a supply side argument as unconventional oil and gas reserves are developed globally. However demand side arguments are equally important. As China moderates its growth expectations, it is possible that this will result in a moderating pace of oil demand growth.
Brent crude prices continue to deteriorate and are approaching the psychological $100 which has represented an area where demand has returned on a number of occasions over the last two years. One of the primary reasons $100 has offered support is because it represents Saudi Arabia's favoured minimum price. Therefore as prices deteriorate the most salient question will be when and to what extent Saudi Arabia curtails production. In the meantime a clear upward dynamic would be required to check potential for a further test of underlying trading.
Of the shares listed in the above report Indian listed ONGC, Hong Kong listed China Petroleum & Chemical Corp and Australian listed Oil Search all found support in the region of their respective 200-day MAs this week and sustained moves below them would be required to question medium-term uptrend consistency.