Asia's oil demand revival bears the brunt of China's endless lockdowns

Asia's oil demand outlook for 2022 is starting to look dimmer than what it was a couple of months earlier, as China's strict lockdowns aimed at battling the resurgence of the COVID-19 pandemic overshadow positive oil demand signs emerging from the rest of Asia.

While most Asian governments are easing restrictions, aiding a sustained recovery in oil demand, China is pursuing a zero-COVID-19 policy that has led to a drop in the appetite for transportation and other fuels in Asia's largest oil consumer.

This is prompting oil analysts to believe that China's oil demand growth at best may remain flat in 2022 over the previous year, with the possibility of slipping into the red. As a result, Asia's overall demand growth may drop to relatively modest levels in 2022.

"Asian oil demand growth is expected to slow in 2022 as China's demand has been hit by a resurgence of COVID-19, with lockdown measures imposed across many major cities. Based on our latest April outlook, China's growth will be flat this year, after growing by 550,000 b/d in 2021," Lim Jit Yang, advisor for Asia-Pacific oil markets at S&P Global Commodity Insights, said.

Demand growth for the rest of Asia, excluding China, is expected to average 713,000 b/d this year, up from 660,000 b/d last year, despite the impact of high fuel prices, according to S&P Global's Platts Analytics.

"In contrast to China's zero COVID policy, many countries in the region continue to push for reopening of their economies," Lim said.

"Nonetheless, the improvement from the rest of Asia will not be able make up for the vacuum left by China, with the region to see sharply lower growth this year versus 2021. Overall, we expect Asian oil demand to grow on year by 716,000 b/d in 2022, down from 1.2 million b/d in 2021," he added.

Platts Analytics has revised down Asia's oil demand growth forecast for 2022 to 716,000 b/d from the previous forecast of 1.08 million b/d, mainly due to China's consumption woes.

China pulls down growth

Market sources and analysts said China's crude demand is unlikely to recover in the near term as domestic demand remains weak, forcing refiners to cut throughput.

"We have revised down China's oil demand to almost no growth this year owing to the demand loss in Q2. It remains uncertain whether demand loss in Q2 will be compensated by demand recovery in H2. That will increase the possibility of further downward revisions," Wang Zhuwei, S&P Global Commodity Insights' Asia oil analytics manager, said.

S&P Global has estimated China's Q2 throughput, including crude and other feedstocks, to fall 4% year on year to 14 million b/d.

In April, run rates at the country's four state-owned refiners fell to 76.4%, the lowest since 76.1% in April 2020, according to S&P Global data, while private integrated refineries have slashed throughout to as low as 70% from their highest levels of over 130% seen in the last two years.

"The central government in China is set to stick to the zero-tolerance policy, at least until this wave of COVID-19 resurgence ends," a Guangzhou-based source with knowledge about China's public hygiene policy said.

As the recent wave of the pandemic in Beijing catches the attention of the market, analysts are concerned that lockdowns might expand to more Chinese cities.

"Regarding the impact of the zero-COVID strategy on China's economy and major types of financial assets, we believe the worst is yet to come," Nomura said. "Over the past week, China's COVID caseloads have moderated, but overall sentiment has worsened further."

A different story elsewhere

While the pandemic in China is casting dark clouds over Asian oil demand, the picture is somewhat different in the rest of Asia.

In South Korea, for example, small food and beverage as well as retail businesses are thriving once again, helping the transportation of goods and services to rise drastically and contribute to robust diesel and gasoline demand, according to middle distillate fuel marketers at major South Korean refiners including S-Oil.

"The end of winter means construction activity will also pick up. With the government's strong determination to resolve tight housing supply, we expect the construction sector to boost diesel demand as well," the fuel marketing and distribution manager at S-Oil said.

In addition, India's demand for oil products totaled 19.41 million mt, or 4.9 million b/d, in March, up 4.2% from March 2021, data from the Petroleum Planning and Analysis Cell showed.

India's crude runs were 106% in March, oil ministry data showed, up from 99% in March 2021. Platts Analytics expects Indian refinery runs in 2022 to be stronger than in 2021 by about 8%.

"As the summer season kicks off across the world and people take to leisure travel, most Asian countries are doing away with COVID restrictions, encouraged by milder effects of the newer coronavirus variants, in order to cater to pent up demand from both domestic and foreign tourism," Rajat Kapoor, managing director for oil, gas and chemicals at Synergy Consulting, said.