Chinese Oil Demand Set For First Annual Drop In Over Three Decades

Earlier today we reported that the IEA revised down its estimate for global demand growth in 2022 by 110Kb/d to mmb/d. But what was most remarkable is that according to the energy agency, China faces its biggest annual drop in oil demand in more than three decades due to the continued Covid-19 lockdowns and the seemingly neverending property crisis weighing on growth in the world’s No. 2 consumer.

According to the Paris-based IEA, Chinese oil demand will decline by 420,000 barrels a day, or 2.7%, this year in the first annual drop since a 1% retreat in 1990. The pullback that year is the only previous retreat in IEA records dating back to 1984, according to Bloomberg calculations. This is remarkable because the country, which was the engine of world oil consumption for much of the past two decades, managing to expand even during the 2008-2009 financial crisis and 2020 pandemic, according to IEA data.

“For now, a deteriorating economic environment and recurring Covid lockdowns in China continue to weigh on market sentiment,” said the agency, which advises most major economies. 

The projected decline in China prompted the IEA to trim overall global oil demand forecasts in its latest monthly market report.

And with the economic backdrop darkening, OPEC+ recently pivoted from increasing supply back to tightening it, and signaled that it could make further cutbacks in the months ahead.

The Chinese downturn is being partially offset by “robust” use of oil in many countries for power generation, as they switch away from costly natural gas, the IEA said. About 700,000 barrels a day will be absorbed by this in the fourth quarter and in early 2023, double the levels seen a year ago.

Still, the agency noted a split between markets for crude oil — which face a projected surplus of 1 million barrels a day in the second half of the year — and the refined products used by consumers.

Overall oil supplies have been maintained as IEA members like the US release emergency stockpiles, and as Russian exports prove surprisingly resilient to an international backlash following the invasion of Ukraine, the agency said. Yet supplies of diesel, used for trucks, and jet fuel remain “exceptionally tight,” it said. Diesel markets have been constricted as China and India limit exports.

Oil markets generally could still be tightened in the months ahead as European Union sanctions on Russian sales take effect in early December, the agency cautioned.