China's oil demand to face downward pressure on rising COVID-19 cases: analysts

China's appetite for domestic oil consumption may remain subdued for an extended period following the rising number of confirmed COVID-19 cases, but analysts and trade sources told S&P Global Commodity Insights Nov. 28 that the current situation won't alter Beijing's stance on pursuing a zero-COVID policy.

While more and more analysts are adjusting their oil demand projections for China downwards for the November-January period, oil markets are searching for answers on how early in 2023 Asia's biggest oil consumer might see a revival in demand.

On Nov. 27, China's new COVID-19 cases hit a fresh high of 40,052, according to the National Health Commission, with most of the cases being reported from the leading cities of Guangzhou, Chongqing and Beijing.

S&P Global earlier in November had revised its estimate for China's Q4 oil demand downwards by 62,000 b/d, from an earlier projection, with gasoline and gasoil demand falling 36,000 b/d and 66,000 b/d, respectively. As per that estimate overall 2022 demand is expected to fall by 550,000 b/d.

And now, as the pandemic cases rise, S&P Global is considering whether to revise down those numbers again.

"The number of cases has surged faster than we expected, exceeding the record high of Q2 when Shanghai was locked. It has not peaked during this wave yet. The winter is the peak season for the pandemic to spread. We expect more and more scattered lockdowns and 'suggestions' on movement restrictions," said Sun Sijia, an analyst with S&P Global.

Mobility challenges

Sun said gasoline demand was facing the maximum amount of downward pressure, while jet fuel is unlikely to see any recovery, as previously expected, since there was no strong indication of a rise in international flight traffic due to the relaxed measures on foreign travelers announced earlier in November.

A Beijing-based analyst with an international investment bank, who had been optimistic on the COVID-controls with the new 20 measures released on Nov. 11, has now reduced gasoline demand consumption outlook by 200,000–300,000 b/d for November-January from his previous forecast amid the worsening situation.

"There is no hope to see any mobility recovery for Lunar New Year travels in January, from the current level. Rising cases mean more lockdowns, while non-infected people are reluctant to move to avoid infection as they have been educated that COVID-19 kills," the analyst said.

ANZ Research in a note dated Nov. 25 said: "Mobility data in China is showing the impact of a resurgence in COVID-19 cases. This remains a headwind for oil demand, that combined with weakness in the USD, is creating a negative backdrop for oil prices."

"China's road traffic is drifting lower amid rising COVID-19 cases. This is likely to be a drag on oil demand. China's refining is rising for the third consecutive month to cater for strong external demand for oil products," it added.

Persisting zero-COVID policy

Meanwhile, analysts in Beijing, Hong Kong and Singapore expect Beijing to keep its zero-COVID policy unchanged in the foreseeable future.

The Communist Party's official newspaper, People's Daily on Nov. 28 said China would "unwaveringly persist" in its COVID-19 policies to control the pandemic scientifically and accurately, and emphasized correcting attitudes including "underestimating the problem," despite protests lockdown happened in some key cities including Shanghai, Wuhan, Chengdu and Guangzhou on Nov. 26-27.

"The new 20 measures give more guidelines for people to protect their rights amid prolonged lockdowns, while it also takes time for local governments to learn and adjust their controls to meet the zero-COVID targets. These generate the conflict, and such type of protest is absolutely controllable in China," a Hong Kong-based analyst said.

Nomura lowered China's GDP growth forecast for 2022 to 2.8% from 2.9%, while its estimates for 2023 were slashed to 4% from 4.3% on expectations of broader COVID-19 curbs in the coming months.

At 4:30 pm Singapore time (0830 GMT), the ICE January Brent futures contract was down $4.81/b (5.6%) from the previous Asia close at $81.1/b, while the NYMEX January light sweet crude contract fell $4.67/b (5.94%) at $73.98/b.