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

 

This will require an improvement in global growth as well as a change in Chinese domestic conditions. won't happen anytime soon

Amid the doom and gloom of the crude oil market, it looks like it could end this tumultuous year with prices languishing where it began: China.

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 scrapped, we will almost certainly see an immediate demand surge, comparable to the rest of the world's reopening in 2021, with energy markets booming.

up to a point. But assuming a direct relationship with other countries risks misrepresenting the different important ways China consumes oil.

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 is not 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 sluggish: 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 other countries buy more Chinese imports, it leads to a boom 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 in industrial plants. Used to apply and help power. 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, which increased by 23 million tonnes (possibly due to some change in the way diesel is defined by China's statisticians).

In fact, the only factor preventing China's crude consumption from reaching a new record this year is a sharp drop 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 to stamp out lingering signs of inflation, and the World Trade Organization is predicting a sharp slowdown in trade next year, forecast to grow just 1% compared to 3.5% this year. Is.

This is in line with where the leading forecasters see things. The Organization of the Petroleum Exporting Countries expects oil demand to continue falling in the first quarter of 2023 to around 55,000 barrels per day, before starting to climb through the rest of the year as demand for flexible feedstocks picks up. Together the journey begins again. The International Energy Agency believes that consumption will run at a relatively low level compared to 2019 until the middle of the year, when it should eventually overtake the 2019 high.

It's a sign that China's long run as a driver of oil growth is coming to an end. Domestic oil demand has not expanded notably since reaching a plateau in early 2021. Most of the growth in consumption we have seen this year has come from the exports 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 seen its addiction to foreign crude as a national security risk may be on the verge of kicking the habit.