China’s approach to global markets is one to follow: Fuel for Thought

Reflecting on the state of the world in Singapore a few weeks ago, Fatih Birol, the executive director of the International Energy Agency, offered praise for how well China has managed its ascendancy up the oil demand table.

China has plenty of oil demand in front of it. Here’s a sobering thought: at a little more than 3 barrels per person per year, per capita oil demand is a fraction of Western Europe’s 13 barrels per person per year, and well below the 20 barrels every American consumes each year.

One of the lesser appreciated facets of China’s rise has been its broadly rational approach to engaging global markets. Chinese companies have so far chosen to utilize existing benchmarks—rather than possibly fracture markets with an aggressive push to create new trading norms, or perhaps attempt to split benchmarks to create a few that trade in a “China-friendly” economic sphere.

The global oil markets are a complex ecosystem where there are many strong actors, but no one holds the winning card in supply, demand, or trading. China’s choice to commit to global systems, rather than push hard for a new zone, helps keep those balances intact, ultimately for the good of the global economy.

It stands to reason that Chinese companies will demonstrate greater agency in the markets, too. Better for those companies to be operating in line with international norms and in generally transparent environments, than to push to balkanize trade into East and West, or simply a state of Chinese markets and the rest.

China’s decade of historic demand growth slowed only two years ago, leaving it the second biggest consumer of oil in the world, and the largest importer of waterborne crude oil. This catapulted China’s major oil companies from bit players in spot markets to heavyweights nearly overnight. Carrying major exposure to spot markets and the price benchmarks they generate, it makes sense that China’s companies have become more active as demand moves inexorably higher.

Spot market influence grows

Their presence has been keenly and suddenly felt.

Looking at participation in spot markets when measured by trade data from the Platts Market on Close assessment process, one of the few sources of transparent data around physical commodity market trading, we can see that so far this year three of the five most active companies trading Dubai and Oman crude so far this year have been Asian companies.

Chinaoil and Unipec, trading arms of China’s state-run oil CNPC and Sinopec, have so far been the two largest participants in the Platts Dubai and Oman benchmarks. Followed by Shell, Vitol, and Indian oil giant Reliance, the Chinese giants have taken a lead in liquidity that matches China’s leap to prominence in the markets generally.

This is in stark contrast to those same markets ten years ago. Looking back to MOC data from 2006, the markets had a very different complexion. Shell and Phibro—the physical oil trading group owned by Citigroup—were the top two participants in Dubai and Oman, followed by Glencore (which has since listed), Unipec (then just the fourth biggest participant), and SK Energy of South Korea.

At the same time, those observable spot markets have grown substantially in volume, meaning that Chinese companies have grown their share of trade by growing volumes in markets—rather than by cutting into the trade volumes of others. The growth in trade volumes is apparent for all to see—volume of trade in Dubai and Oman hit more than 135 million barrels in the Platts MOC last year, up from 22.5 million barrels in 2005, a six-fold growth in the size of the publicly reported market.

This sort of growth presents challenges for benchmarks, which can be well met by ensuring adequate deliverable supply in underlying markets.

China has pointed the way towards a rational approach to engaging global oil markets and benchmarks for the next new super-economies, particularly India.

A glance at the top ten oil consumers in the world shows the importance of China’s pragmatic approach to global markets. After the US and China, we find: Japan, India, Russia, Saudi Arabia, Brazil, South Korea, Germany, and Canada.

The best chance of maximizing oil market efficiency as markets adjust to the up-and-comers on that list will come if the companies from those countries look at the China model, which, it seems, is ultimately one that is willing and able to function within a shared, global market.