China's oil market may have something to cheer after changes to COVID measures

China's oil and commodity markets may already be breathing a sigh of relief and hoping for a demand revival following the recent adoption of new measures that could send a strong signal to global markets that Beijing may be starting to ease its stringent zero-COVID policy to revive its flagging economic growth and restore normalcy for its citizens.

The latest move by Guangzhou, the capital city of Guangdong province, China's top GDP contributor, prompted commodity markets to seek answers as to whether this could trigger an earlier-than-expected reopening of the entire economy and prompt a demand revival in the world's second-largest economy and Asia's biggest oil consumer.

The developments have taken many oil analysts by surprise, who until a few days ago, were looking to revise downwards their consumption estimates for China's oil demand. While market sources were of the view that China was keen to arrest the weakening economic growth following three years of tight COVID controls, analysts were of the opinion it may be too early to jump to conclusions.

"Like what other countries do when moving towards reopening, Guangzhou released some instructions for citizens to deal with COVID-19, which is in preparation to handle growing number of cases," Sun Sijia, an analyst with S&P Global Commodity Insights, said.

"But we still need to observe whether China will have more targeted lockdowns when cases rebound strongly, and whether other cities would ban people movement from Guangzhou or follow the measures taken in Guangzhou," she added. These moves would determine the revival of China's transportation fuel demand.

S&P Global Commodity Insights earlier in November revised downward its estimate for China's Q4 oil demand 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. Sun Sijia said more observation was needed for further adjustments as the Chinese government may alter COVID-19 restrictions frequently, which could mean that the demand revival process in 2023 could be somewhat erratic.

Transport fuel demand

Lockdowns in leading cities, including Guangzhou, Chongqing and Beijing during the current COVID-19 resurgence have heavily damaged transportation fuel demand, especially gasoline.

Guangzhou on Nov. 30 announced plans to remove most movement controls and resume public transport despite residential towers with confirmed cases remaining under lockdown. Moreover, it did away with regular PCR tests for the entire population, while encouraging self-ART tests. Officially, it allowed close contacts to remain isolated at home instead of being ferried away to quarantine facilities.

These policies were announced despite Guangzhou's new COVID-19 cases still relatively high at 6,312 on Nov. 30, accounting for 18% of total new cases in China that day, according to the National Health Commission.

"This could signal that China is beginning to consider the end of its stringent zero-COVID policy," ANZ Research said in a Dec. 1 note. "The authorities appear confident about the challenges to China's medical capability; this suggest a full reopening could be possible before next March."

Moreover, vice premier Sun Chunlan, who is directly responsible for the country's public health affairs, was noted to have stopped mentioning zero-COVID in her speeches during meetings with NHC on Nov. 30 and Dec. 1, adding that the Omicron variant was less likely to cause illness. She said on Dec. 1 that China would keep optimizing and improving COVID-related control measures by taking appropriate steps.

The zero-COVID policy has been the main factor impacting not only China's oil demand, but also its overall GDP growth, as it means more lockdowns and controls have to be in place when COVID cases grow; halting transportation and restricting movement.

Sun Chunlan's speech and the move in Guangzhou point possibly to the beginning of the end to China's zero-COVID policy, lifting slightly the probability of a positive scenario, Nomura said in a Dec. 1 note, but added that the path to "living with COVID" may still be slow, costly and bumpy.

Recovery in Q2

Oil analysts said the rising cases would dampen demand even if the government loosens controls.

"People movement would still slow for a while before a rebound as the infected people are on sick leave, while a certain proportion of the remainder stay home voluntarily to avoid infection," a Beijing-based oil analyst said, adding that a downturn remains in the cards for Q1 2023.

CNPC Economics & Technology Research Institute expects China's petroleum consumption to rise in Q2 2023 when transportation makes a notable recovery as the COVID control policy is further optimized, with a 2% growth for the whole year, the institute's deputy head Jiang Xuefeng said during the International Energy Executive Forum jointly held by CNPC and S&P Global Commodity Insights in Beijing on Dec. 1.

Jiang estimated China's 2022 petroleum demand to fall 2% year on year, driven by the 7.3%, or 28 million mt, year-on-year decline in oil product consumption, as the pandemic dampens transportation fuel demand.

China is under pressure to meet its targeted GDP per capita growth rate so as to attain the status of "medium-level developed country" by 2035 due to its slower economic growth in 2020-2022 amid the COVID-19 headwinds, said Wang Yiming, vice-chairman of China Center for International Economic Exchanges, Dec. 1. He said the target required an average annual GDP growth of about 5.5% during the fourteenth Five-Year plan in 2021-2025 and around 4% in 2026-2035.

S&P Global expects China's GDP to grow 2.7% in 2022 and 4.7% in 2023.

"Chinese policymakers are unlikely to face much pressure on the GDP front, so they will have the opportunity to carry forward structural reforms previously set for 2022," ANZ Research said.