The International Energy Agency says it will change its method of calculating China's oil demand.

Previously, IEA calculated apparent demand as the sum of Chinese refinery output and net product imports but this measure didn't account for changes in product inventories for China, the world's second largest consumer of oil. The Chinese government doesn't publish actual consumption data.

Citing China's rapidly expanding refining capacity which can result in significant swings in inventory volumes, IEA, in its monthly report on the oil market released Wednesday said there is a need to account for changes in oil stocks held by Chinese companies.

"Whereas estimates of demand in (Organization for Economic Cooperation and Development) countries and many other economies stem from surveys and reports of actual product deliveries, in the case of China, 'demand' is really a balancing item -- in effect a function of estimated product supply," the report said.

To better reflect China's oil demand, the IEA will use reported stock changes in gasoline, gasoil and jet/kerosene published each month by the Xinhua-run China Oil, Gas and Petrochemical newsletter in its assessment, Platts news service reports.

The IEA says the new way method "smoothes out abnormal swings in apparent demand."

For example, China's apparent demand growth last November and December was at double digits, compared to an average of 2.9 percent earlier in the year.

But IEA's report states, "The ramp-up in Chinese apparent demand in late 2012 is thus partly misleading, in as much as it lumps together real consumption and a buildup in stocks, which has the potential to come undone later on thus causing an equally misleading downswing in apparent demand."

IEA also questioned whether the sharp increase in demand China experienced at the end of 2012 would continue.

"While higher Chinese refinery runs at that time may have responded to an actual increase in end-user demand, they may also have led to significant product inventory builds, potentially setting the stage for a slowdown or for an increase in product exports later on," the report said.

As for China's refining capacity, the IEA estimates that it rose by 300,000 barrels per day in the fourth quarter of 2012 and it projects an additional expansion of 300,000 barrels per day this year.

"In the last few months, Chinese companies have aggressively expanded their refining capacity, turning China into a budding product exporter -- a trend that is likely to continue," says the report.