Concerns about China’s oil demand amid a new Covid outbreak, renewed restrictions, and protests against the ‘zero-Covid’ policy have weighed on market sentiment in the latter half of November, dashing hopes for a fast reopening after Chinese authorities eased some inbound travel quarantine rules earlier in the month. Oil prices slumped to their lowest level since December 2021 early this week as market participants focused much more on potential demand loss in China than on the potential supply loss from Russia days before the EU embargo and price cap on Russian crude oil kick in.
Still, according to Rystad Energy, China’s latest movement restrictions might not be as much of a drag on oil demand as the market fears. Other analysts, as well as the International Energy Agency (IEA) and OPEC, think that Chinese demand will take a hit, dragging down global oil demand growth this year and early next year.
Fears of a major slump in Chinese demand could be exaggerated, considering that road traffic in the world’s top crude oil importer has been so far only marginally affected by the fresh Covid curbs, while airline traffic was already stagnating in October, according to a market commentary this week from Claudio Galimberti, Senior Vice President of Analysis at Rystad Energy.
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“Oil markets may be misjudging news of China’s lockdown,” Rystad Energy said in an analysis.
“The impact of the latest lockdowns as reflected in real-time traffic activity shows their likely effect on China’s short-term oil demand, particularly in transportation, is likely to be minor.”
Real-time data on mainland Chinese road activity compiled by Rystad Energy points to a small downturn in country-level road traffic, down from 97% to 95% of 2019 levels during the fourth week of November. To compare, the strict large-scale lockdown in Shanghai in April 2022 resulted in country-level road traffic numbers plunging to around 90% of pre-Covid levels.
“In essence, so far, the latest round of lockdowns appears to be mimicking previous ones, with nationwide road traffic only marginally affected while selected provinces undergoing comparatively severe lockdowns to try and suppress COVID-19 outbreaks,” Rystad Energy says, adding that the protests against the zero-Covid policy are an uncertainty going forward.
Other analysts expect weak oil demand and economic growth in China to continue to depress oil market sentiment and oil prices in the short term. But demand is set for a surge at some point next year when China eventually reopens.
“At some point, China will unleash demand for travel the likes of which we will not have seen for a long, long time,” Tim Clark, president of the Emirates airline told Bloomberg last week. “The longer they press the cork down in the water, the greater the velocity of return.”
Jeff Currie, global head of commodities at Goldman Sachs, told CNBC earlier this week that “Demand is probably heading south again in China given what’s going on.”
China was one of the three factors—alongside the U.S. dollar and Russia pushing crude to the markets before the December 5 embargo—which led Goldman Sachs to recently downgrade its oil price forecast by $10 to $100 per barrel, Currie said.
Buts Goldman still has a “very positive” outlook for 2023 and is sticking with its $110 Brent Crude forecast for next year, he added.
According to Ole Hansen, Head of Commodity Strategy at Saxo Bank, traders have recently focused on China’s demand concerns.
“The slowdown in demand from China will be temporary but having unsuccessfully fought Covid outbreaks with lockdowns for months, the prospect for an improvement looks months away and with the added risk of an economic slowdown reducing demand elsewhere, traders have increasingly been forced to change their short-term outlook,” Hansen said on Tuesday.
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The feared slowdown in Chinese demand and economic growth—with manufacturing and services activities further declining in November to seven-month lows—could prompt OPEC+ to announce further cuts to its oil production targets at the meeting on December 4.
“I think there is a high probability that we do see a cut,” Goldman’s Currie said.
Another OPEC+ cut and possible further downgrades to global oil demand growth from OPEC and the IEA in their December reports will only confirm the fact that China is and will be a major driver of oil demand and oil prices.
By Tsvetana Paraskova for Oilprice.com
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