The latest dip in oil prices below $40 a barrel is good news for Asia’s motorists, but it stands to boost the already-growing reliance of China and other big crude consumers on imported oil.

U.S. oil fell below $40 a barrel Monday for the first time since April and was beneath it again in early Wednesday trading in Asia. Brent crude, the international benchmark, is hovering around a three-month low of $42.03.

The consensus view among analysts is that the oil market will shift to a balance in the coming months—but some see prices staying suppressed in the near term. “We expect crude prices to bottom out in the high $30 range,” said Michael Wittner, energy analyst at Société Générale.

Low oil prices have sent China’s oil imports soaring to record levels in recent months—the country now rivals the U.S. as the world’s top importer—and the continuing price decline will keep those imports elevated, analysts say. China’s daily crude imports this year should come to 7.4 million barrels, said Song Yen Ling, an analyst with S&P Global Platts, up 10% from last year’s 6.7 million.

Several factors are driving the import binge: Last year, China stopped requiring privately owned refiners to buy oil only from state-owned producers. This led to a significant pickup in overseas-oil buying by these independent “teapot” refiners.

At the same time, the price slump has hit oil production in China, where many fields are aging and growing more expensive to pump.

State-owned oil producers pegged their investment budgets to $50 crude, said Nelson Wang, energy analyst at CLSA. With oil back to $40, investment and production should continue to decline, leaving imports “to fill the gap,” he said.

But there is a paradox behind the rise in oil imports: Growth in actual demand for petroleum in China appears to be slowing.

This is partly due to China’s broader economic slowdown and its efforts to shift the economy away from heavy industry toward services, which require less in the way of industrial fuels like diesel and fuel oil.

That means a significant portion of China’s imported oil isn’t being consumed in China—it is being stocked away in strategic or commercial reserves or processed and reexported.

This latest fall in oil prices comes as the world—Asia included—is already awash in refined fuels. Refiners around the globe overestimated summer gasoline demand, a miscalculation that has sent the amount of gasoline stored world-wide to near-record levels of about 500 million barrels, Citigroup estimates. The resulting glut propelled China’s gasoline exports to a record in June and could blunt its need for imported oil going forward, analysts say.

Source: Wall Street Journal