Factory activity in China declined more slowly this month, suggesting rebounding demand for energy, in oil specifically.
Per a Reuters report, the slowed decline was the result of Covid restrictions getting relaxed in several major industrial hubs. The news immediately pushed Brent crude higher.
China's purchasing managers' index rose to 49.6 this month from 47.4 in April, and beating economists' predictions for an increase to 48.6. Yet the country is not completely out of the woods with regard to Covid and its effect on the economy and oil demand.
"It shows the impact of COVID-19 outbreaks in May have not fully ended, leaving the economic outlook grim since the second quarter in 2020," Reuters quoted a Huaxing Securities analyst as saying.
"Indeed, there continues to be signs of supply chain disruptions in the survey breakdown," said Capital Economics analyst Sheana Yue. "Delivery times lengthened further while firms continued to draw down their inventories of raw materials, although at a less rapid pace than in April."
This suggests that China's oil demand outlook also leaves something to be desired, although it is improving. Higher oil prices will hardly help this demand's recovery now that Brent topped $122 per barrel following the news that the EU had agreed to phase out almost all Russian oil imports by the end of the year.
China has been the biggest beneficiary of EU action targeting Russia's oil industry as it has forced the latter to sell its crude at a discount, and much of it has been going to China.
For May, Russian seaborne oil exports to China are seen hitting 1 million bpd, up from 750,000 bpd in the first quarter and 800,000 bpd a year earlier, Reuters reported earlier this month.
Meanwhile, total oil imports have also been recovering, posting a gain for April after three months of declines. The daily average stood at 10.5 million bpd, which compared with 9.82 million bpd a year ago and 10.06 million bpd in March this year.
By Charles Kennedy for Oilprice.com
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Comments
This means that Russian unwanted crude by the EU will easily find its way to China and India. Meanwhile the inept EU will be replacing Russian oil at a price of $130 a barrel in coming months thus adding an annualized $14.24 bn to its oil-import bill.
During the recent lockdown in the Shanghai region and few other regions, analysts, investment banks and the hapless IEA were competing with each other in reporting Chinese declining oil demand whilst I was warning against judging China’s demand by a one-month decline. It has to be judged over a year.
China has again surprised the world by having been recently adding 2.0 mbd even at prices ranging from $110-$114 to its inventories. Moreover, I bet you any money that the bulk of these imports were Russian oil barrels.
Today China served oil bulls some good news, namely that its purchasing managers' index rose to 49.6 in May from 47.4 in signalling more oil demand. The proof is that China and India the world’s largest and third largest importers of crude are competing with each other for Russian oil.
In May Russian seaborne oil exports to China have risen from 750,000 barrels a day (b/d) to 1.0 mbd in the first quarter of the year. In addition Russia exported during the same period an estimated 500,000-600,000 b/d to China via its pipelines bringing total Chinese crude imports from Russia to 1.5-1.6 mbd.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London