Pandemic resurgence may apply brakes to Asia's oil demand revival

The sustained revival in oil demand that Asia has been witnessing may face fresh setbacks following news of COVID-19 outbreaks in China and other countries in the region, but the possibility of a sharp pull back in consumption appears remote, analysts told S&P Global Commodity Insights.

With the global oil market having factored in the fallout from the Russia-Ukraine conflict, analysts said the market was now focused on watching whether any of the top Asian oil consumers, such as China and South Korea, will resort to more lockdowns to stem the spread of the pandemic.

"Asia's oil product demand has been hit by a double whammy of high oil prices and a resurgence of COVID-19," Lim Jit Yang, advisor for Asia-Pacific oil markets at S&P Global Commodity Insights, said. "Aviation remains the most vulnerable component of oil demand due to travel restrictions, even though most countries are pushing toward the reopening of economies."

According to Lim, high frequency indicators, such as the Apple mobility index, seemed to have remained robust so far, but will likely ease with rising retail fuel prices. "Furthermore, the outbreak of omicron in China is likely to have a bigger impact on oil demand as restrictions on movement are widely implemented in cities across 20 provinces and municipalities with quasi-lockdowns," he said.

S&P Global Commodity Insights, in its latest projections for Asia, has revised its 2022 Asian oil demand growth down 334,000 b/d from a month ago to 1.1 million b/d.

China, South Korea

After recording a steady fall in new cases since February, the world is seeing new clusters of infections in China, South Korea, Vietnam and Hong Kong.

Daily infections in Asia exceeded 1 million cases for the first time around mid-March, and averaged more than 760,000 over the first three weeks of March, more than double the level a month ago.

But governments are cautiously optimistic on the impact and have resisted announcing severe lockdown restrictions, while encouraging basic precautionary measures. With the exception of China that is rigorously following its zero COVID policy and imposing lockdowns, none of the other countries have announced any new restrictions to personal mobility or economic activity.

COVID controls in eastern China, where most of the country's refining capacity is located, have had less impact on refinery and port operations as these regions have adopted more targeted controls to minimize the impact on the economy, refiners in Shanghai, Shandong and Jiangsu provinces have told S&P Global.

China's President Xi Jinping has pushed for "swift containment" of the outbreak, but at minimum cost, to reduce the socioeconomic impact as much as possible.

On the other hand, South Korean oil refiners said they were more concerned that rising pump prices would sap oil demand more than surging COVID-19 cases.

"Local refiners are concerned about the surge in COVID-19 cases, but the bigger concern they face is sharp increases in retail oil prices that would weaken oil demand and refining margins," an official at the Korea Petroleum Association said.

Gasoline and diesel pump prices in South Korea have surged to the highest in 9 1/2 years despite a 20% temporary cut in oil taxes from November last year.

The supply challenge

The International Energy Agency on March 18 urged OPEC+ countries to boost output, adding that the global oil market faced a 2.5 million b/d supply shortfall as a result of the Ukraine crisis.

"We expect crude prices to strengthen in the coming months as the threat of sustained lockdowns due to new COVID variants remains low, and supply issues will continue to persist -- not only in Russia, but also the inability and disinclination of OPEC to enhance production," Rajat Kapoor, managing director for oil, gas and chemicals at Synergy Consulting, Inc said.

The group, consisting of OPEC, Russia and several other allies, has been gradually rolling back the record production cuts it instituted during the market crash of 2020 in 400,000 b/d monthly increments, but the US, India, Japan and other crude customers have criticized the pace as far too slow.

However, some economists are not too pessimistic on the impact of new COVID-19 outbreaks on Asia.

Priyanka Kishore, head of India and South East Asia Economics at Oxford Economics, said that for some Asian countries, the financial outlook could be thrown into turmoil if energy and commodity prices keep surging, raising concerns about the macro stability of emerging markets.

"On the positive side, the pandemic's drag on economies is fading. China's situation is different, owing to its continued zero-COVID approach. To date, however, the combination of this strategy and the spread of omicron across the rest of the world has not led to the scale of disruption that some feared a few months ago," she added.