Concerns about China’s demand for oil amid the new Covid outbreak, renewed restrictions and protests against the “zero Covid” policy weighed on market sentiment in the second half of November, dashing hopes for a quick reopening after Chinese authorities eased inbound travel quarantines. rules at the beginning of the month.
Oil prices fell to their lowest level since December 2021 earlier this week as market participants focused much more on a possible slowdown in demand in China than on a possible loss of supply from Russia days before an EU embargo and Russian crude price cap take effect.
However, according to Rystad Energy, China’s latest restrictions on movement may not reduce oil demand as the market fears. Other analysts, as well as the International Energy Agency (IEA) and OPEC, think Chinese demand will take a hit, slowing growth in global oil demand this year and early next year.
Concerns about a significant drop in Chinese demand may be overblown, given that road traffic in the world’s biggest crude oil importer has so far been little affected by the new Covid curbs, while airline traffic had already stagnated in October, according to market commentary. this week from Rystad Energy Senior Vice President of Analysis Claudio Galimberti.
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“Oil markets may misjudge news of China’s blockade,” Rystad Energy said in an analysis.
“The impact of the latest blockages, reflected in real-time traffic activity, suggests that their potential impact on China’s short-term oil demand, particularly in transport, is likely to be modest.”
Real-time data on mainland China’s road activity compiled by Rystad Energy shows a slight decline in road traffic at the national level, falling from 97% to 95% in the fourth week of November compared to 2019 levels. In comparison, the strict large-scale lockdown in Shanghai in April 2022 caused the number of national road traffic to drop to about 90% of pre-Covid levels.
“For now, it basically looks like the latest round of lockdowns is mimicking the previous ones, with nationwide road traffic only slightly affected while some provinces are in relatively heavy lockdowns to try to suppress the outbreaks of COVID-19,” Rystad Energy says, adding that Protests Against Zero Covid politics creates uncertainty in future life.
Other analysts expect weak oil demand and China’s economic growth to continue to weigh on oil market sentiment and oil prices in the short term. But demand is expected to pick up at some point next year when China finally reopens.
“At some point, China is going to unleash demand for travel that we haven’t seen in a long, long time,” Emirates president Tim Clark told Bloomberg last week. “The longer they push the cork in the water, the higher the rate of return.”
Jeff Curry, Goldman Sachs’ global head of commodities, told CNBC earlier this week that “demand is probably going south again in China, given what’s going on.”
China was one of three factors, along with the U.S. dollar and Russia, that drove the crude oil market ahead of the Dec. 5 embargo, prompting Goldman Sachs to recently lower its oil price forecast by $10 to $100 a barrel, Currie said.
He added that Goldman still has a “very positive” outlook for 2023 and is sticking with the $110 Brent crude forecast for next year.
According to Ole Hansen, head of commodity strategy at Saxo Bank, traders have recently focused on Chinese demand concerns.
“The slowdown in demand from China will be short-lived, but after failing to combat the Covid outbreak with months of lockdowns, the prospect of an improvement looks months away, and with the added risk of an economic slowdown dampening demand elsewhere, traders are increasingly forced to shift their short-term outlook, ” Hansen said Tuesday.
Fears of a slowdown in Chinese demand and economic growth, with manufacturing and services activity falling further to a seven-month low in November, could prompt OPEC+ to announce further cuts in oil production targets at their Dec. 4 meeting.
“I think there is a high probability that we will see a reduction,” Goldman’s Currie said.
Another OPEC+ cut and possible further downgrades of global oil demand growth from OPEC and the IEA in the December reports will only confirm the fact that China is and will be the main driver of oil demand and oil prices.
By Tsvetana Paraskova for Oilprice.com
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