China's August oil demand strong but outlook muted

BEIJING (Reuters) - China's apparent oil demand grew a strong 7 percent in August from a year earlier, as energy firms made a last month of massive imports to bolster stocks for the Olympics, even as domestic demand started to flag.

Oil traders and analysts said they were looking beyond the August data, because it masks weak consumption and brimming inventories that together give a far bleaker outlook for demand from the world's number two oil consumer.

Fuel piped into storage tanks in China shows up as implied demand because the government does not report stock levels. This year's record shipments, much of which are languishing in tanks, has fed straight through into the apparent consumption figures.

"There is a lot of inventory to consume," said Victor Shum at Purvin & Gertz in Singapore.

"We are likely to be seeing oil demand growth slowdown in China for the remainder of the year."

China's economy is feeling the whiplash of the global credit crunch and although it is faring better than most industrialized nations, growth in manufacturing and export industries is flagging, dragging down oil consumption.

Top importer Sinopec has already wrapped up a summer oil-product buying spree, and stocks are so high it plans to cut both crude purchases and refining rates for the rest of the year, a company official said last week.

Several big new refineries coming on-stream this year, including a first for offshore specialist CNOOC, are also cutting the need for transport fuel imports.

RECORD INVENTORIES

Driven by patriotism, government pressure and tax breaks, Sinopec (SNP.N)(0386.HK) and rival PetroChina (PTR.N)(0857.HK) made record fuel imports this summer to guarantee smooth supplies during the Olympics after months of sporadic shortages.

In late July, diesel inventories held by the country's two biggest oil firms were nearly double levels a year earlier and up more than a quarter from June, a state-owned newsletter said.

The stockbuilding has given an injection to apparent demand growth, which in July soared to a two year high even as oil hit a record above $149 a barrel and China's drivers wrestled with a surprise rise in state-set fuel prices.

In the year through August, implied demand -- net imports plus refinery output, but excluding inventory changes -- rose 6.1 percent to 7.39 million barrels per day, the figures showed.