The stark contrast between China’s massive economic growth and minimal reserves of oil and gas has made it the major global backer of crude oil and many other commodities over the past 20 years or so. According to figures from the Energy Information Administration (EIA), China overtook the United States as the world’s largest total annual importer of crude oil in 2017, after becoming the world’s largest net importer of total oil and other liquid fuels in 2013. COVID-19 virus outbreak Around the world in 2020, China’s strict ‘zero COVID’ policy is hurting its engine of economic growth and its appetite for oil and gas used to fuel it. There was uncertainty about the possibility of easing this policy, but this did not prove correct and is unlikely to be in the near future, leaving the big bid sidelined in the oil markets, and a host of other bearish factors that are set to drive oil prices significantly lower. .
At the beginning of March, China experienced the largest wave of coronavirus infections since the one that crossed Wuhan in early 2020, with new cases concentrated across its northeastern and coastal regions, mostly in Jilin and Shandong provinces. At that point, although the official rhetoric did not indicate any relaxation in the strategy to contain the emerging coronavirus in the near term, last December saw a revision of the strategy to include the idea of ”dynamic clearing”. “This has provided local governments with more flexibility in imposing restrictions, allowing daily increases in symptomatic cases of about 200 cases on a national basis,” said Eugenia Vabon Victorino, head of Asia strategy for SEB, in Singapore. oilpress.com. Even then, she added, there were clear limits to this flexibility, with China’s still aggressive approach to tracking potential exposures to the virus and placing more than 184,000 individuals under medical observation in isolation within two weeks or so of the new outbreak in March. .
Although oil prices look weak at that point, they looked considerably softer with news at the end of March that the economic powerhouse of Shanghai, with a population of 26 million, was put into a two-phase lockdown. This was followed in early April by news that authorities in other cities, including Ningbo (population 4.2 million) and the capital, Beijing (22 million), had begun implementing limited restrictions to curb the spread of the virus. Again, at that point, there were hopes of mitigating the zero-COVID approach, sparked by the publication in the second week of April by the Chinese Center for Disease Control and Prevention (CCDC) of a guide explaining quarantine measures. at home. These measures appear to point to the possibility that people with very mild symptoms or no symptoms at all, but having tested positive for COVID, may be able to self-quarantine at home rather than having to go to centrally operated facilities. state to do so. However, hopes that such measures could be introduced were dashed when the CCDC repeated in a later clarification the previous set of stringent policies.
At that point, the Organization of the Petroleum Exporting Countries highlighted the downward impact on global crude oil prices of the “Chinese COVID” factor in its report as Reducing the forecast for global demand for oil for 2022 by 480,000 barrels per day. At about the same time, the International Energy Agency (IEA) gave the same reasoning in lowering the forecast for global demand for 2022 by 260,000 barrels per day. Until then, with Brent crude trading near $110.00 per barrel, and talk of a possible bullish ban on Russian oil prices in Europe spreading across the markets, the International Energy Agency also warned that although crude prices were affected. They are reversing their recent highs: “It remains alarmingly high and poses a serious threat to the global economic outlook.” These measures and comments were provided even before China ramped up its anti-COVID programs, with the end of April seeing announcements of mass testing for the virus across Beijing, and other cities, including Hangzhou (population 12.2 million). By the beginning of May, some analysts had calculated that the impact of the ongoing shutdowns in China was reducing demand for crude from the country by about 1 million barrels per day, with no indication of when or how the decline would end. Related: The world is witnessing its first global energy shock: the World Energy Council
Even before the coronavirus transmission spike in mid-March, many major banks deemed China’s 2022 economic growth target of “about 5.5 percent” too ambitious, and big data releases in April showed they were right. The official April Purchasing Managers’ Index (PMI) – the main indicator that shows the state of manufacturing activity in the country (with a reading above 50 showing expansion and below 50 indicating a contraction) came in at just 47.4 for the month, Lowest level since February 2020. The chief statistician of China’s National Bureau of Statistics (NBS), Zhao Qinghe, stated that: “The production and operation of … enterprises have been greatly affected. [by COVID-related actions]. “
Late last week, TS Lombard (TSL), the leading independent global research house in economics and investment strategy, told Oilprice.com that it believed the Chinese economy would likely contract this quarter and lowered its forecast for China’s full-year 2022 economic growth to just 3.3% ( Although it believes that for political reasons the official report from Beijing will be economic growth in 2022 close to 5.0 percent). Although the current Omicron wave of COVID has peaked and the number of areas classified as high/medium risk has decreased in recent days from recent highs, the situation remains low and stimulus measures are less effective in the absence of COVID conditions and winds The opposite structure, according to TSL. “Beijing is deeply committed to ‘zero COVID,’ which makes further lockdowns almost inevitable during the remainder of 2022,” Rory Green, head of China and Asia research at TS Lombard in London, told Oilprice.com last week. “Healthcare restrictions, including a low vaccination rate and inadequate numbers of hospitalizations and staff, combined with policy ahead of the Q4/22 party convention — X closely related to current COVID policy — make an end to strict COVID restrictions unlikely in the next nine months. “.
It is true that China recovered quickly and aggressively from previous major coronavirus outbreaks until 2020, but it is now more difficult for it to recover than it was back then. “Two years ago, China bounced back from the initial Wuhan lockdown thanks to very strong external demand, limited business competition, a real estate boom and a relatively less contagious strain of COVID, but in 2022, completely opposite conditions apply,” Green emphasized. “We expect China to slowly recover from the current Omicron wave, especially as stimulus complications are lower and although there is a significant boost to infrastructure and monetary policy will continue to ease, restrictions on mobility, consumer confidence and wage growth are all factors that make stimulus less effective.”
Written by Simon Watkins for Oilprice.com
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