China’s post-Covid reopening won’t be enough to save oil markets

The country consumes about one in six barrels of oil in the world, and has been wobbling from lockdown to lockdown for most of this year as it strives to maintain Covid zero. Now that policy has been informally junked, we will almost certainly see an immediate demand surge as the rest of the world reopens in 2021, sending energy markets into overdrive.

up to a point. But assuming a direct correlation with other countries runs the risk of misrepresenting the important ways China’s oil consumption differs.

For one thing, transportation isn’t as efficient as it is elsewhere. Gasoline, diesel, and jet kerosene account for 72% of oil barrels used in the US and 68% in the European Union. In China, it is just 54%. Petrochemicals, defined broadly to include everything that isn’t a liquid fuel, account for another quarter of the barrels in the US and Europe. In China, it is 42%. (1)

This should disappoint the perception that 2022 has been a tumultuous year for China’s oil demand. Gasoline and jet fuel production, as might be expected from the lockdown, has been in the doldrums: 146 million metric tons were consumed in the 10 months to October, down 17 million tons from 2021.

However, other products are booming in line with the increasing value of export trade. When foreign countries buy more Chinese imports, it is increasingly for the plastic feedstocks that go into making them, as well as the diesel that is used to transport goods from factory to port, to fire generators at industrial plants. And used to help electricity. Ships carrying products to foreign ports.

In the same 10 months, production of feedstocks of LPG, naphtha and ethylene stood at 112 million tonnes, up 9.1 million tonnes from the previous high. Diesel consumption was 153 million tonnes, up by 23 million tonnes (possibly due to some change in the way China’s statisticians define diesel).

In fact, the only factor that has prevented China’s crude consumption from reaching a new record this year is a sharp decline in asphalt production. Production through October fell 16 million tons from a year earlier, a drop of nearly a third that shrunk more than total demand for any other single product. This parallels the bust in the country’s real estate sector: bitumen is mainly used to level roads that link new property developments to cities, as well as building materials such as roofing.

Oil demand is always a more complicated story than a straight correlation between driving behavior and crude consumption, but it is more prevalent in China than in any other large economy. Petrochemicals not only account for a bulk of barrels, but are also a sector unusually exposed to exports, and thus demand conditions well beyond China. Even diesel, the largest piece of barrels, is less transport-exposed than in other countries, thanks to its role in providing feedstock to chemical plants in the vast manufacturing sector and powering on-site generators. .

That is why there is reason to think that even a rapid removal of Covid-zero restrictions now will not be enough to spark a sudden jump in demand early next year. This will require an improvement in global growth as well as a change in Chinese domestic conditions. Don’t hold your breath. The US Federal Reserve is still raising interest rates higher to stamp out lingering signs of inflation, and the World Trade Organization is forecasting a sharp slowdown in trade next year, to grow just 1% compared to 3.5% this year. Estimates.

This is in line with where the leading forecasters see things. The Organization of the Petroleum Exporting Countries expects oil demand to continue to decline by about 55,000 barrels per day in the first quarter of 2023, before resuming travel along with demand for flexible feedstocks. The International Energy Agency believes that consumption will run at a relatively lower level than in 2019 until the middle of the year, when it should eventually overtake 2019 highs.

This is a sign that China’s long period as a driver of oil growth is nearing its end. Domestic oil demand has not expanded notably since reaching a plateau in early 2021. This year we have seen most of the increase in consumption in the export of products from the country’s refineries and factories. India, which consumes about one barrel for every three barrels used in China, is often a more significant contributor to marginal demand these days. A nation that has long viewed its addiction to foreign crude as a national security risk may be on the verge of kicking the habit.

The text of this story is published from a wire agency feed without any modification.