China to see modest recovery in short-term oil demand, new COVID-19 cases a concern

China's demand for transportation fuel may increase slightly in the near term as the country has accelerated efforts towards reopening and reviving its economy and restoring normalcy for its citizens, analysts and traders told S&P Global Commodity Insights. However, the recovery in oil demand may not be sharp in December and January amid rising COVID-19 cases, they added.

Beijing announced Dec. 7 the removal of COVID-19-related checking and other barriers for movement within regions in the country, and allowed COVID-positive patients with less severe symptoms to quarantine at home instead of staying in isolation facilities along with eight other measures.

"These two measures are worth highlighting as they will result in an explosive growth in new cases across the country, a measure [that] can't [be taken] back due to the fast spread of the Omicron variant. They were also announced just a week after Guangzhou became the first city to remove most of the movement controls, showing that Beijing is keen to hasten the steps towards reopening," a Beijing-based analyst said.

The government also set economic growth as the focus of the Politburo meeting Dec. 6, and the discussions centered around active fiscal stimulus, expanding domestic demand and policies for self-reliance technology development.

"Cross-location mobility should increase given travelers no longer need to show a green code (a health certificate) for transportation. This increases the chance of resident mobility improving for the Chinese New Year," ING said in a note dated Dec. 7.

S&P Global Commodity Insights said in a report dated Dec. 8 that "massive numbers of COVID-19 infections nationwide are expected during or ahead of China's Lunar New Year holidays in January when billions in passenger turnover will accelerate herd immunity with or without improved vaccinations."

The expectation of infections rising has also weighed on Chinese refineries' crude procurements for December and January delivery.

Infected people will be on sick leave, while a certain proportion of the remainder stay home voluntarily to avoid infection, and private cars will remain the preferred mode of transport for travel in the next few months, analysts said.

S&P Global expects China's gasoline demand to fall 10% year on year to 3.2 million b/d in Q4 2022 and Q1 2023, respectively, while jet fuel demand is likely to fall 34% year on year in Q4 to about 414,000 b/d before recovering to 486,000 b/d in Q1 2023.

The cases of COVID-19 peaking earlier than expected will lead to an early demand rebound, which is likely to happen in Q2, analysts in Beijing and Shenzhen said.

S&P expects travelling interest in China to recover in Q2 or Q3 2023, raising jet fuel demand 36% on the year to 656,000 b/d in 2023, still 33% below pre-COVID-19 levels in 2019. Gasoline demand is expected to rise 7% to 3.6 million b/d.