The huge gap between China’s massive economic growth and its minimal oil and gas reserves has made it the world’s great supporting supply of crude oil and many other commodities for the past 20 or so years. According to figures from the Energy Information Administration (EIA), China overtook the United States as the world’s largest annual crude importer of crude oil in 2017, having become the largest net importer of petroleum and other liquid fuels in the world in 2013. outbreak of the COVID-19 virus across the world in 2020, China’s strictly enforced “zero-COVID” policy has damaged its engine of economic growth and its appetite for oil and gas used for feed it. There have been whispers that this policy might be relaxed, but these have not proven correct and are unlikely to be in the near future, leaving big supply to the side in the oil markets, and a plethora other bearish factors are expected to drive oil prices down significantly. .
In early March, China saw the largest surge of COVID infections since those in Wuhan in early 2020, with new cases concentrating in its northeastern and coastal regions, mainly in Jilin provinces. and Shandong. At this point, although the official rhetoric signaled no relaxation of the zero-COVID containment strategy in the short term, the previous December had seen a refinement of the strategy into one incorporating the idea of ”dynamic compensation “. “This has given local governments more flexibility to impose restrictions, allowing the daily increase in symptomatic cases to be limited to around 200 on a national basis,” said Eugenia Fabon Victorino, head of Asia strategy for SEB, in Singapore. . Oilprice.com. Even back then, however, she added, there were clear limits to this flexibility, with China’s still aggressive approach to tracing possible exposures to the virus putting more than 184,000 people under medical observation in isolation within about two weeks of this new outbreak in March. .
Although oil prices seemed weak at this point, they still looked considerably weaker with news at the end of March that the economic city of Shanghai, which has a population of 26 million, had been placed in a two-step locking. This was then followed in early April by reports that authorities in other cities, including Ningbo (population 4.2 million) and the capital Beijing (population 22 million) had begun to put in place limited restrictions to curb the spread of the virus. Again, at that time, there had been hopes for a relaxation of the zero-COVID approach, fueled by the publication the second week of April by the Chinese Centers for Disease Control and Prevention (CCDC ) a guide outlining home quarantine measures. These measures seemed to indicate the possibility that people with very mild or no symptoms, but who have tested positive for COVID, may be able to self-quarantine at home rather than having to go to facilities. state-run centralized facilities to do so. However, hopes that such measures might be introduced were also dashed when the CCDC, in a later clarification, simply reiterated the previous set of strict policies.
At this point, the downward effect on world crude oil prices of the “COVID China” factor was highlighted by OPEC in its report in which it cut its global oil demand forecast for 2022 of 480,000 barrels per day (bpd). Almost at the same time, the same reasoning was advanced by the International Energy Agency (IEA) in lowering its 2022 global demand outlook by 260,000 bpd. Even then, with Brent crude around the $110.00 per barrel (bp) level and ubiquitous talk of a potentially bullish ban on Russian oil prices in Europe whistling through the markets, the IEA said. further warned that although crude oil prices had come back down from recent highs they still “remain at troubling levels and pose a serious threat to the global economic outlook.” These actions and comments were made even before China stepped up its COVID programs, with announcements in late April of mass testing for the virus being rolled out in Beijing and other cities including Hangzhou (12, 2 million inhabitants). In early May, some analysts had calculated that the effect of ongoing lockdowns in China was reducing the country’s demand for crude oil by around a million barrels a day, with no indication of when or how that decline would end. . Related: World Sees First Global Energy Shock: World Energy Council
Even before COVID transmission exploded in mid-March, several major banks viewed China’s economic growth target of around 5.5% for 2022 as too ambitious and April’s big data releases showed they were right. The official Purchasing Managers’ Index (PMI) for April – the key indicator that shows the state of the country’s manufacturing activity (with a reading above 50 indicating expansion and below 50 indicating contraction) only hit 47.4 for the month, the lowest level since February 2020. The Chief Statistician of the National Bureau of Statistics (NBS) of China, Zhao Qinghe, stated that: “The production and operation of…enterprises have been strongly [by COVID-related actions].”
Late last week, leading independent global economic and investment strategy research firm TS Lombard (TSL), told Oilprice.com that it believes the Chinese economy is likely to contract this quarter and cut its forecast for China’s economic growth for the year 2022 to just 3.3% (although it believes that for political reasons Beijing’s official report will show 2022 economic growth close to 5.0%). Although the current Omicron wave of COVID appears to have peaked and the number of areas classified as high/medium risk has declined in recent days from their recent highs, the fact remains that mobility remains weak and that stimulus measures are less effective under zero-COVID conditions and structural headwinds, according to TSL. “Beijing is firmly committed to ‘zero-COVID,’ making further lockdowns almost inevitable for the rest of 2022,” Rory Green, head of China and Asia research at TS Lombard, London, told Oilprice. .com last week. “Health care limitations, including low immunization rates and insufficient hospitals and staff, combined with politics ahead of the Q4/22 Party Congress – Xi is closely associated with current COVID politics – make unlikely an end to strict COVID restrictions in the next nine months,” he said.
True, China rebounded quickly and strongly from its previous major COVID outbreaks through 2020, but it is now more difficult to recover than it was then. “Two years ago, China rebounded from the initial Wuhan lockdown thanks to very strong external demand, limited trade competition, a property boom and a relatively less contagious COVID strain, but in 2022 diametrically opposite conditions will s ‘enforce,’ Green pointed out. “We expect China to recover slowly from the current wave of Omicron, especially as stimulus multipliers are lower and although a major infrastructure push is underway and monetary policy continues to ease, the fact remains that mobility restrictions, consumer confidence and wage growth all make stimulus less effective,” he concluded.
By Simon Watkins for Oilprice.com
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