Is Chinese Demand Growth Now The Only Bullish Driver For Crude?
China’s recovery is underway, and many anticipate that China’s recovery will mean calls for additional crude oil, bolstering oil prices. But China’s economic reemergence is anything but a sure thing when it comes to oil demand and prices.
Household consumption, factory activity, and infrastructure spending all rose in the first two months of the year, showing that the world’s top crude oil importer has started to shake off the weak activity from the zero-Covid policy. But uncertainty in the global economy threatens to weaken demand for exports out of China.
Despite a sluggish start to 2023, China’s energy commodity imports are expected to rise later this year, while oil demand is set to rebound and lead global oil consumption to a record high, forecasters say.
Amid fears of an economic downturn due to rising interest rates and the financial markets selloff in the past week, which spread to risk assets such as crude oil, the key question for analysts is whether China’s expected increase in crude oil imports and demand will be enough to prop up oil prices.
Crude prices fell to the lowest levels in 15 months this week as concerns about the banking sector spread from the U.S. to Europe with fears about Swiss giant Credit Suisse and sparked selloffs.
Chinese energy commodity imports were underwhelming in January and February 2023, but they are expected to pick up later this year with potentially record-high crude oil purchases, even though Beijing has set its lowest annual economic growth target in decades.
In January and February, months in which China reports trade data together to remove distortions around the fluctuating week-long Lunar New Year holiday, Chinese imports of crude oil and natural gas fell compared to 2022. But arrivals of iron ore—the key steel-manufacturing material—jumped as steel mills stocked up in expectation of a government push to boost the economy via infrastructure projects.
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China’s crude oil imports averaged 10.4 million barrels per day (bpd) in January and February, down by 1.3% compared to the same months in 2022, according to Chinese customs data cited by Reuters’ Asia Commodities and Energy Columnist Clyde Russell.
The weaker crude oil import levels could be due, in part, to the Lunar New Year holiday at the end of January and the fact that crude cargoes are typically arranged months ahead of their actual arrival and customs clearance.
This month, China’s crude oil imports are expected at around 11.18 million bpd, per Refinitiv Oil Research cited by Reuters’ Russell.
The latest official Chinese economic data from this week showed that retail sales jumped by 3.5% in January-February from year-ago levels, following a 1.8% decline in December 2022. Industrial output also rose in the first two months of 2023 from a year earlier, and infrastructure investment surged by 9% as the government increased spending to support economic growth.
In addition, a rebound in crude oil demand as the Chinese economy returns to normal operation pushed crude oil throughputs at refineries higher by 3.3% over the first two months of the year.
Both OPEC and the International Energy Agency (IEA) expect China to drive global oil demand to a record high this year.
China’s reopening is set to add momentum to global economic growth, OPEC said in its Monthly Oil Market Report (MOMR) this week, as it revised up its forecast for Chinese oil demand growth.
“In the emerging economies, China’s reopening, following the lifting of the strict zero-COVID-19 policy, will add considerable momentum to global economic growth,” OPEC said.
China’s oil demand is expected to average 15.56 million barrels per day (bpd) in 2023, up by 710,000 bpd compared to last year, according to OPEC’s latest estimate. That’s higher than the 590,000-bpd growth expected in last month’s report.
The IEA, for its part, said in its monthly report that the oil market is set to swing from a supply overhang in the first half of 2023 to a deficit in the latter part of the year as the economic rebound in China will push global oil demand to a record high.
“Building stocks today will ease tensions as the market swings into deficit during the second half of the year when China is expected to drive world oil demand to record levels,” the IEA said.
“Matching that increase would be a challenge even if Russia were able to maintain production at pre-war levels.”
By Tsvetana Paraskova for Oilprice.com
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