IEA Adjusts Measure of China's Oil Demand

runs, but putting products into storage, consumption would be overestimated under the old model. Conversely if China reduced refinery runs, but drew down product stocks, the old IEA model would underestimate demand.

In its new methodology the IEA takes into account changes in product stocks, using data provided by the Chinese government. That should solve the problem. But as Antoine Halff, head of the oil market unit at the IEA explains, it is not that simple.

"The government data on stocks are full of holes. They do not capture all of the refineries in China, and they only provide percentage changes from an unspecified starting point. It is a safe bet that our estimate for stock builds and drawdowns can at times be vastly underestimated," Mr Halff says.

In the absence of more reliable data, the IEA has little option but to track the official government data. But the smoothed apparent demand curve produced by the new IEA methodology continues to show improbable spurts and sudden dips, which would suggest much more volatility in China's economic output than has in fact been the case.

That brings into question the link between estimates of Chinese demand, such as the IEA's, or the Chinese government's official monthly estimate of crude import data, and actual demand.

Mr Halff is quick to point out that China has been rapidly improving its data-collection process, and to praise the progress made so far. "We should remember the Chinese government has more at stake than anyone else in getting the data right," he says.

But in the short term the implication is that Chinese demand, which was a key factor in the run-up in Brent prices at the start of the year, has been overestimated.

Using its new method, the IEA reduced its estimate for Chinese demand in its latest monthly oil market report, arguing that refining capacity has grown faster than domestic consumption in recent months, leaving room for product build.

With government data on stocks still incomplete, investors may also be advised to embrace scepticism in the long term.

"It would not be surprising if over time the market became a bit more jaded about headline oil demand numbers for China," Mr Halff said.