China's crude oil demand in 2023 could be one of the best: Vitol's Muller

China's oil demand in 2023 could surpass recent previous levels amid the lifting of COVID-19 restrictions, robust domestic consumption and attempts to build up inventories which may dent global spare oil capacity, the head of Vitol Asia said on March 5.

Chinese refiners that cranked up their runs and maximized exports in the fourth quarter of last year amid the country's attempt to balance the market are now not supplying much, leading to "a rather bullish tone straight after Chinese New Year" in January, Mike Muller told the Gulf Intelligence energy podcast.

"Those exports all but dried up because domestic margins were good, domestic consumption was good and there seems to be some desire to build inventory as opposed to putting it in the international market space," Muller said. "Most analysts seem to have been revising their estimates for Chinese oil and gas consumption up for the balance of this year, substantially so, which will make 2023 one of the biggest years for year-on-year demand that we have seen."

Chinese crude demand may reduce the world's spare oil production capacity, which is mostly concentrated in the hands of China and Russia, with US shale liquids production languishing amid escalating costs and low-than-expected deployment of drill rigs, he added.

Bullish forecasts for Chinese demand

The International Energy Agency is among the organizations that has turned bullish on China.

The Paris-based agency raised its estimate of global oil demand growth for this year by 100,000 b/d to 2 million b/d on the back of a "resurgent" China and an aviation recovery, it said in its latest monthly oil market report published Feb. 15.

OPEC has also forecast China's oil consumption to rise 400,000 b/d year on year in the first quarter of 2023 and 800,000 b/d on the year in the second quarter, with ground and air travel seeing strong rebounds after years of strict lockdown measures, it said in its latest monthly market report published Feb. 14.

China also may cut its clean oil product exports to as low as 1.5 million mt (385,000 b/d) in March from above 3 million mt in the previous months due to the maintenance season while domestic demand recovers amid reopening coupled with negative export margins, market sources previously told S&P Global Commodity Insights.

Already feedstock imports by China's independent refineries fell 8.9% month on month to 15.18 million mt, or 3.97 million b/d, in February, data from S&P Global showed.

Despite these bullish signs for China, OPEC officials remain cautious amid the organization's October decision to cut two million b/d from oil production quotas starting November until the end of 2023.

Subsequent OPEC+ meetings in December and February have seen the alliance, co-chaired by Saudi Arabia and Russia, stick to the cuts amid the backdrop of Russia's planned 500,000 b/d cut in production in March in retaliation to Western sanctions on its crude following its invasion of Ukraine in 2022.

Self-sufficient Russia

On Dec. 5, the G7 countries imposed a $60/b cap on Russian oil in parallel with the start of an EU ban on crude imports from Moscow. The G7 on Feb. 5 slapped a cap on Russian crude products also to coincide with an EU ban on these oil derivatives.

Despite the price cap and EU sanctions, Russia has been able to sustain its production, with its volumes falling just 10,000 b/d on the month to average 9.85 million b/d in January, according to the latest Platts survey by S&P Global.

Although some Western officials have said Russia's 500,000 b/d cut may be prompted by technical difficulties with oil production, Muller has said they have been proven wrong, as Moscow continues to ship its crude to markets farther afield, creating "a visible realignment of trade flows."

"I think consensus on the market was, on initial evidence one year in, Russia seems pretty self-sufficient in terms of its technical capabilities," Muller said.

However, shipowners, insurance companies and banks "have to tiptoe around the legislation that has been issued not by one jurisdiction but by three separate jurisdiction the US, EU and UK and finding alignment there is taking them some time," he said.

Rising Asian LNG consumption

LNG demand in southeast Asia is expected to perk up in 2023 as more economies take advantage of lower prices.

The Platts JKM spot LNG price for delivery into northeast Asia hit a record high of $84.76/MMBtu in March 2022, according to S&P Global data. It was last assessed at $ 13.963/MMBtu on March 3.

China's appetite for imported LNG ranks among the greatest uncertainties for 2023, according to the IEA, after net imports plunged by an unprecedented 21% in 2022 compared with a 17% increase in 2021.

"What happened in Asia when LNG prices went to these crazy, crazy levels, the Asians turned their back on it or, to put it differently, demand destruction occurred and all the attention went to coal," Muller said.

"Those south Asian economies are back, and they are buying because to them LNG in the mid to low teens works," he said. "It creates more demand for the LNG, and it creates a more global balance, where there might be a redirection of Atlantic Basin LNG cargos this way to Asia."

The surge in Asian demand for LNG will stop those countries from burning expensive diesel, as "gas is now at a point where it is at an equilibrium level versus other fuels," he added.