Relaxation of China’s COVID policy unlikely to stimulate short-term oil demand
The world heaved a sigh of relief when Beijing announced on Nov. 11 measures to relax its COVID restrictions. However, these are insufficient to effectively stimulate short-term oil demand at Asia’s top consumer, especially since the country’s zero-COVID policy remains its top priority, analysts and market sources said Nov. 15.
This move also suggests that China would rely on oil product exports to sustain its crude throughput when consumption slows in winter, and while the privately-held 320,000 b/d greenfield Shenghong Petrochemical undergoes commissioning operations.
“China’s oil demand is more likely to weaken further as the relaxation would cause the number of COVID cases to surge in winter, a peak season for COVID-19 to spread, leading to more scattered lockdowns or movement controls within the zero-COVID policy,” said Sun Sijia, an analyst with S&P Global Commodity Insights.
Sun expected a real demand recovery to most likely happen in March, after Lunar New Year celebrations are over and political reshuffling at the National People’s Congress is completed.
S&P Global revised its estimate for China’s Q4 oil demand downwards by 62,000 b/d from its previous projections, with gasoline and gasoil demand falling 36,000 b/d and 66,000 b/d, respectively, amid more lockdowns.
Crude oil traders with leading state-owned firms told S&P Global they were considering slowing they purchase of December-loading cargoes as these new measures may lead to an increase in COVID cases, which could subsequently dampen demand.
“Oil demand may remain weak over November and December as millions of people are still under lockdown and the zero-COVID policy is still in place,” Sun Jianan, an analyst with Energy Aspect, said.
The measures were relaxed when China’s COVID-19 cases exceeded 10,000 for the first time since May — 10,919 on Nov. 11 and 14,473 on Nov. 14 — with the country’s manufacturing center Guangzhou city in partial locked, according to the National Health Commission. This compared with 14,520 on May 3 when the financial center Shanghai was under complete lockdown.
The measures worth noting included a shorter quarantine for close contacts and inbound travelers to “5+3”, or five days in a quarantine facility and 3 days at home, from “7+3”; no longer tracking secondary close contacts, narrowing the scope of high-risk areas and no designated medium-risk areas.
Moreover, the central government will promptly identify and correct those who implement over-restrictive measures such as lockdowns, school and factory closures which are against COVID policy guidelines. Officials that violate these guidelines could face consequences if found to have caused serious damage.
“Zero-COVID remains the ultimate target. It has been difficult even when tight controls were in place, so it will only become more difficult with controls relaxed,” a Beijing-based policy observer said. “This is a year-end exam for local governments and it takes time to learn how to do it right. While the Chinese are more likely to avoid exposure and stay at home voluntarily when cases rise as they have been educated that COVID-19 kills.”
Only jet fuel demand to rise
S&P Global revised its jet fuel demand estimates up 7,000 b/d from its previous projection, the only oil product to see an upward adjustment in demand, supported by an increase in the number of international flights following the implementation of these new measures.
As per the relaxed measures, Beijing will stop the “circuit breaker” mechanism so that inbound flights need not be canceled. In addition to the shorter quarantine, it has relaxed its PCR test requirements and set up “quarantine-free areas” for short-term foreign visitors.
However, the adjustment in jet fuel demand estimates is capped by the risk of a decline in domestic flights as COVID-19 cases rise, analysts said.
“The government’s move against Lunar New Year travels will be the next window to watch. Will they repeat the call to stay local during the festival for another year, or whether there will be any real relaxation on people flows,” Energy Aspect’s Sun said.
Despite the possibility of these new measures pushing China’s COVID-19 cases higher, analysts said the relaxation in restrictions is a process that China must go through before the country can progress to a complete reopening and real recovery from the three-year long pandemic.
“We think the announcement marks a steady step towards China’s eventual reopening,” Deutsch Bank’s chief economist Xiong Yi said in a Nov. 11 report.
“Policymakers are well aware of the negative impact of COVID restrictions on the economy and people’s lives and are trying to ease some of them. They are not ready yet to reopen immediately, but they are refocusing on the necessary steps including vaccination, treatment, and protecting the vulnerable groups,” Xiong added.
S&P Global projected China’s oil demand would grow in 2023 driven by a strong rebound in the second half when the government is better prepared for a reopening.