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2 Energy Picks for Our Bearish View on Chinese Oil Demand

Preston Caldwell

Preston Caldwell: We have recently updated our outlook on China oil and gas demand. In short, we're above consensus on China's medium-term oil and gas demand. However, our oil forecasts shift to being bearish in the long-term looking out to 2040, owing to our differentiated view on EV (electronic vehicle) adoption.

In terms of implications, we're maintaining our midcycle oil price of $55/bbl WTI, and therefore impact for oil stocks is negligible. On the other hand, our above-consensus view on China's natural gas consumption drives a bullish view on LNG (liquefied natural gas) imports. This has a significant impact on the global LNG market and boosts our already bullish view on LNG-levered names Cheniere and Shell among others.

Going into a bit of detail on the oil side, we think China's oil demand grows at a 3.3% rate over the next five years, compared to consensus of about 2.4%. At the macro level, we're avoiding a key mistakes made by other analysts. We think China's GDP growth has been somewhat inflated in recent years, which has led others to overestimate the extent to which China's economy can grow without oil. At the micro or product level, we're comparatively bullish on gasoline, diesel, and jet fuel. For example, we think the medium-term impact of fuel efficiency improvements on putting the breaks on gasoline demand is overrated.

However, our China oil demand view swings from above consensus to below once we extend our time horizon past the next five years and all the way out to 2040. Morningstar's differentiated view on electric vehicle adoption drives our long-term bearishness. We think China reaches peak oil by about 2030.

Now on the gas side: We expect China natural gas consumption will reach 407 billion cubic meters, about 9% above the consensus comparison by 2023. This draws on our view that China's leadership will meet its ambitious targets for natural gas as a share of China's energy consumption. Cleaner-burning natural gas is targeted as a replacement for coal in select applications. Given past success in meeting energy targets, we think the natural gas target will be readily achieved.

Combining this bullish consumption view with disappointing contribution from pipeline imports and domestic Chinese production, we are very bullish on China's LNG demand, forecasting 14% annual growth over the next decade.