One day China's oil demand is bad and the next, good. Welcome to another mystery from The Middle Kingdom. Yesterday oil prices were pressured on reports of bulging inventories in China and weak demand. Platts reported that Chinese oil demand in August slid 5.4% from July. Platts said that China's implied oil demand totaled 33.02 million metric tons in August versus 34.92 million metric tons in July. Oil refiners in China are reporting that demand is still weak. Reuter's news reported that Chinese oil company Sinopec had sales of refined oil products still lower than one year ago. Reuters says that despite a moderate inventory draw in August, China's diesel inventories had been building up faster than gasoline had in past months, reflecting the slower consumption for the main transportation fuel used by Chinese industry and trucks.
Of course that was yesterday. Today oil is getting a boost on a report that China oil imports are the second highest ever. Chinese oil imports increased by 8 percent to 17.92 million metric tons giving oil bulls hope that demand in China is not as bad as feared after yesterday.
The truth is that China's oil demand is largely dependent on the strength of the dollar. The weak dollar has encouraged China to import more oil than they need. At the same time, it has the added benefit to hedge China's massive bond and dollar holdings. If the dollar increases in global value, China will not need to purchase as much is the short run as supplies are plentiful. The bottom line is: it will not be China that drives the next move in oil, it will be the Fed.
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