The Main Factor Impeding China’s Recovery In Oil Demand

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  • Platts Analytics cuts Sep demand projection by 200,000 b/d
  • May further lower estimates: analysts
  • Eased controls possible after congress, but zero COVID-19 to remain

A wave of new COVID-19 cases in China could dampen demand growth for oil-related products during the usual high season of consumption in September and October before the 20th Communist Party congress.

Lowered demands 

Analysts in Beijing, Shenzhen, London and Singapore have lowered their key oil products demand estimates by up to 300,000 b/d for the months.

However, they did not expect prolonged month-long lockdowns, as seen in Shanghai in April, would repeat.

China reported 2,057 new infections on Aug. 31, of which 368 were symptomatic and 1,689 asymptomatic, the National Health Commission said on Sept. 1.

In comparison, the number of new infections stood at 393 on July 31.

Chengdu city, a rising economic centre in southwest China, and the Nanshan district in the country’s third biggest city Shenzhen announced lockdowns on Sept. 1 for four days till Sept. 4.

Damage to economy 

The government has been ramping up COVID-19 curbs again since August to prevent infections from going out of control ahead of the party congress to be held in Beijing on October 16.

“Local governments learnt the lesson in Q2, taking quick action to impose pandemic restrictions decisively at an early stage.

However, we are unlikely to see prolonged lockdowns that damage the economy,” a Shenzhen-based analyst with an international research agency said, adding, “with the zero COVID-19 policy bringing more uncertainties, we do foresee huge challenges to a smooth recovery, and thus would want to raise concerns on further downside risks to our current outlook in the event of an escalation of the outbreak.”

Platts Analytics lowered Aug. 31 its projection on China’s oil demand by 200,000 b/d to be at 16 million b/d for September from the previous estimation a month ago.

Energy Aspects has cut demand estimates by 300,000 b/d on average for August and September due to short-term droughts and power shortages in August and the new wave of the pandemic, it said in a report on Aug. 31.

Monthly growth to remain

Nevertheless, analysts continued to see a month-on-month demand increase of about 800,000 b/d in September, considering it is the peak season for gasoil consumption in fishing, autumn harvest and construction.

Construction activities would rise amid cooling weather conditions with gasoil as the fuel for equipment, while industrial production may improve to meet annual targets, which would boost transportation demand.

Also, “gasoline consumption would be supported by regular rides as schools start on Sept. 1, holiday trips during the Mid-Autumn Festival Sept. 10-12 and National Day Oct. 1-7, despite COVID-19 controls that may have some impact on cross-provincial trips,” Sun said.

Platts Analytics expected China’s total oil demand in September to increase about 700,000 b/d from 15.3 million b/d last month and kept its projection for October unchanged at 16.2 million b/d unless wider or longer lockdowns are imposed.

Some analysts, however, have decreased October demand forecasts in line with September reductions, by up to 300,000 b/d.

Gloomy outlook

Virus control measures were the most significant threat facing a Chinese oil demand recovery, analysts said.

The trend of seeing a year-on-year oil demand reduction in 2022 is unlikely to change even with relaxations in movement controls after the party congress, they added.

They expected the country’s annual oil demand to fall 95,000-260,000 b/d from 2021.

“The recent resurgence proves earlier concerns that the government’s relaxation in COVID-19 containment measures for economic growth since the end of June could be unsustainable,” the Shenzhen-based analyst said.

Sinopec, the world’s top refiner by capacity, has cut its throughput target for the second half to 4.79 million b/d, down 2.2% from 4.9 million b/d in the first half and down 7.2% year on year, suggesting a slow recovery in domestic oil demand.

 

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Source: S&P Global

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