Just when you thought all the bad news for oil is out with crude bouncing strongly from its post-GFC low hit two-weeks ago, reports that fuel demand from the world's largest energy consumer could peak sooner than expected could give oil bears a second wind.
China's largest oil refiner, China Petroleum & Chemical Corp (Sinopec), expects demand for diesel in China to peak in 2017, according to a Bloomberg report.
Sinopec's Chairman Fu Chengyu added that gasoline demand will start to decline over the next decade and that Sinopec is preparing to transition its core business away from selling fuel to selling consumer goods at its convenience stores and petrol stations.
The problem is that most Western analysts and oil companies are expecting China and India to deliver most of the demand growth in oil over the next few decades.
The dour outlook stands in contrast to the rally in oil stocks today with the West Texas Intermediate (WTI) jumping close to 5% to touch $US50 a barrel after US inventories rose by a smaller-than-expected amount. The crude oil price has rallied around 15% over the past two weeks.
The rise in the oil price sparked a 1.3% uplift in Oil Search Limited (ASX: OSH), 0.8% increase in Woodside Petroleum Limited (ASX: WPL) and 0.4% rise in Santos Ltd (ASX: STO) ahead of the market close.
The good news is that our oil giants have been aggressively expanding into liquefied natural gas (LNG), a market that moves relatively independently from crude.
This doesn't mean a fall in the oil benchmarks won't weigh on their share prices, but any sell-off in the sector should be used as an opportunity to add to positions in Oil Search and, to a lesser extent, Woodside.
Oil Search is my favorite because it has a stronger growth profile but it is trading on fairly similar multiples to Woodside.
As I wrote last week, both companies are well placed to endure a lower oil price, although this is not the case for Santos due to its higher cost profile, large capital expenditure requirement, bigger debt burden and weaker balance sheet.
