Is China’s Oil Demand Set For A Major Bounce Back?

By Simon Watkins of OilPrice.com

Since the mid-1990s, China’s extraordinary economic expansion almost singlehandedly drove a supercycle in key commodities prices it required to power such growth, including oil and gas. In 2013, it became the world’s largest net importer of total petroleum and other liquid fuels and, as late as 2017, its still high rate of economic growth allowed it to overtake the U.S. as the largest annual gross crude oil importer in the world. Late 2019 saw much of this activity grind to a halt as Covid hit the country, and the economic slowdown was exacerbated by its Draconian ‘zero-Covid’ policy that saw complete shutdowns of major economic centres at the slightest hint of infection. However, 2023 saw it achieve its official gross domestic product (GDP) growth target of “around 5 percent” – posting 5.2 percent in the end. The same official target is in place this year, with the key questions for oil markets being whether this will be achieved and if so, how easily?

16 April saw China’s National Bureau of Statistics release the country’s Q1 GDP figure, which showed a 5.3 percent year-on-year increase. This was way above consensus analyst expectations of 4.6 percent and was also a rise from the Q4 2023’s 5.2 percent. “Aside from the continued decline in the property sector, policy support is filtering through investment,” Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com. “With property sales now 60 percent lower than their mid-2021 peak, transaction volumes are now comparable to levels last seen in 2012,” she added. “Investments in other sectors are also picking up, particularly in manufacturing and energy production and supply, and in the coming months, infrastructure investment will also start to accelerate on the back of fiscal stimulus,” she said. “The strong performance in the first two months of the year suggests that an economic recovery is underway,” she underlined. March’s key Caixin/S&P Global China manufacturing purchasing managers’ index (PMI) also came in very bullish. At 51.1 in the month, up from 50.9 in February (above 50.0 indicates expansion), it was the strongest since February 2023. “Overall, China’s manufacturing sector continued to improve in March, with expansion in supply and demand accelerating, and overseas demand picking up,” said Caixin Insight Group senior economist, Wang Zhe. April’s Caixin China General Manufacturing PMI also increased – to 51.4, beating estimates of 51 – and recording the sixth straight month of growth in factory activity. New orders rose the most in over a year and foreign sales increased at the fastest pace for nearly three-and-a-half years.

This robust performance across several major sectors in China’s economy – including, crucially manufacturing – is in sharp contrast to the growth drivers seen last year. In the immediate aftermath of Covid, the country’s growth became reliant on just reopening the economy and removing negative policies – property, consumer, and geopolitics – rather than on aggressive stimulus, to drive activity, Rory Green, chief China economist for GlobalData.TSLombard exclusively told OilPrice.com at the time. “For the first time, a cyclical recovery in China [was] being led by household consumption, mainly services, as there [was] a great deal of pent-up demand and savings – about four percent of GDP – following three years of intermittent mobility restrictions,” he said. In terms of the effect that this had on oil prices at the time, it is apposite to note that transportation accounts for just 54 percent of China’s oil consumption, compared to 72 percent in the U.S. and 68 percent in the European Union. In 2022 and early 2023, net oil and refined petroleum imports were eight percent lower by volume than the pre-Covid peak, with infrastructure and export-oriented manufacturing partly offsetting lower mobility and less property construction. At that phase of China’s economic rebound, then, oil demand did increase, but the scale of this was far from sufficient to drive oil prices significantly higher on its own. This was even more the case, as China continued where possible to buy oil from Russia at a substantial discount.  

Before this ‘Covid Phase’, China had already undergone several transitions in its core economic growth model, the effects of which continue to be felt to this day. From 1992 to 1998, its annual economic growth rate was basically between 10 to 15 percent; from 1998 to 2004 between 8 to 10 percent; from 2004 to 2010 between 10 to 15 percent again; from 2010 to 2016 between 6 to 10 percent, and from 2016 to the 2019 between 5 to 7 percent. For much of the period from 1992 to the middle 2010s, much of China’s massive economic growth was founded on a huge energy-intensive expansion of its manufacturing capabilities. This also involved the mass migration of new workers from the countryside and into the cities, which required a huge energy-intensive infrastructure build-out. Even after some of China’s growth began to switch into the less energy-intensive service sectors, its investment in energy-intensive infrastructure build-out remained very high. This pattern continued for many years, alongside the third phase of China’s economic growth, which was the rise of a middle class that powered domestic consumption-led demand for goods and services. All these phases had the net result of markedly increasing China’s demand for oil and gas. 

Although this ‘Post-Covid Phase’ of growth currently looks like one that will see powerful drivers from several sectors of China’s economy – including manufacturing – it does not necessarily mean that oil prices will feel the full effects of this. The key reason here is that China continues to buy oil at greatly reduced prices not just from Russia, but also from Iran and Iraq too, through various mechanisms analysed in full in my new book on the new global oil market order. Despite sanctions in place on the first two of these countries, the U.S. is happy to look the other way for the most part, as oil demand being satisfied ‘off the official books’ ultimately feeds through into lower demand elsewhere in the global energy markets, so reducing bullish price pressure. Additionally, China does not want to encourage higher oil prices from any of those multitude of Middle Eastern countries over which it has developed an influence because the U.S. and several of its key allies remain China’s major export customers. The U.S. alone still accounts for over 16 percent of its export revenues. Rising energy prices in these countries could again fuel inflation and cause interest rates to rise, bringing the prospect of economic slowdown with them, as was seen in the aftermath of Russia’s invasion of Ukraine in 2022. According to a senior source in the European Union’s (E.U.) energy security complex spoken to exclusively by OilPrice.com recently, the economic damage to China – directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West – would dangerously increase if the Brent oil price remained over US$90-95 pb for more than one quarter of a year. 

Rising energy prices also have direct ramifications in U.S. presidential elections, in which China does not want to be seen playing a part, at least overtly. Longstanding estimates are that every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost, adversely affecting the U.S. economy. Historically, around 70 percent of the price of gasoline is derived from the global oil price. This feeds through into the second part of this equation, as also analysed in full in my new book, which is that since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. If it was in recession in this timeframe, then only 1 sitting president has won out of 7 times (although even the 1 is debatable).