China's oil thirst hits new high

China's oil demand growth hit a two-year high in July but the pre-Olympic spurt will likely fall off in the autumn, undermined by high prices, global economic woes and the end of official pressure to stockpile for the games.

Implied consumption rocketed 9.5% from a year earlier as the impact of a huge pump price rise filtered through to refinery output and oil companies made record fuel imports to prevent shortages while the world's eyes were on China for the Olympics.

But oil product purchases abroad will drop sharply after the end of the Games, industry sources told Reuters, as the government eases pressure on its energy players to guarantee supplies.

If they draw down brimming storage tanks of transport fuels, which were the main driver of July's demand jump, this could quickly sap apparent consumption figures. These do not include stockpile levels because the data is not published by Beijing.

"The demand growth for the fourth quarter may show some slower growth, impacted by high inventory," said US-based independent analyst Paul Ting in a note to clients.

"China's diesel inventory (and gasoline) reached the highest level on record by the end of June and inventory levels increased in July as well," he added.

Much of July's demand growth spurt was fuelled by diesel and gasoline, which China imported in record quantities.

Demand for kerosene and liquefied petroleum gas fell, while implied fuel oil consumption plummeted over a third, giving perhaps a more realistic picture of consumption.

And in the year through July, implied demand - net imports plus refinery output, but excluding inventory changes - rose a more modest 6% to 7.40 million barrels per day, Reuters calculations from official data showed.

Set to leap back into the demand foreground once the last athletes head home are the pricing problems that have cramped consumption in the past, and triggered the massive imports and pressure to boost fuel stocks.

"After the Olympics demand won't be so good. There is a good chance that the government will speed up efforts to link fuel prices with the international markets," Wu Jun, an analyst at futures players CIFCO in Shanghai, told Reuters.

Beijing has for years been struggling to reconcile a promise to bring state-set energy prices in line with market levels with its fears of the consequences of doing so.

A surprise late June increase helped placate refiners ahead of the Olympics, but even the nearly 20 percent rise - and a fall in crude markets from July's record over $147 a barrel - was not enough to bring them back into the black.

But either a raise or a continuation of the uneasy status quo is likely to be bad news for demand growth. Without an increase, refiners will likely choke off supplies to limit losses, hitting consumption as drivers struggle to find fuel to fill their tanks.

But a further increase could bring the first significant signs of price sensitivity from a group of drivers used to state protection from the vagaries of international oil market.

For some companies struggling with a strenghthening Chinese currency and the impact of a global economic slowdown, it could be the last straw, added CIFCO's Wu.

"The last increase in June already weakened demand. If it happens again, it will have a more serious impact," he said.