- Chinese lockdowns threaten demand.
- EU sanctions to hit the market soon.
- Russian oil production down.
Global oil markets are looking for a new direction it seems as WTI crude oil prices fell below $100 per barrel. The impact of Chinese COVID-related lockdowns are worrying traders, as demand of the Asian giant could be hit dramatically. The ongoing COVID-19 outbreak, at least according to Chinese sources, has put major cities under a severe curfew, blocking not only production and manufacturing but also constraining potential demand for oil and gas worldwide. As WTI futures plunged by 5% to below $98 per barrel, all eyes are on the impact of new lockdown moves in and around Beijing.
At present, China, Asia’s largest economy and oil and gas importer, is fighting an uphill battle against COVID, with record daily deaths figures being reported. A potential oil demand shock is on the horizon, if Beijing is not willing to be more flexible in its fight against COVID. Even that according to most Western standards, China’s COVID figures are still not worrying, the country’s government seems to be looking at it from a totally different angle. The zero-tolerance strategy of Beijing is however now biting not only the Chinese economy in its own foot, but also puts global economic growth at risk.
China’s zero-tolerance bites into demand
The Chinese developments are coming at a moment of already high global turmoil in energy markets, as the OECD sanctions put on Russia, due to its ongoing invasion of Ukraine, are starting to bite. A possible loss of multimillions of barrels of Russian crude oil and gas was already pushing markets to the brink, currently resulting in ever-increasing demand destruction in Europe, Japan and the USA.
China’s zero-tolerance of COVID-19 is not only hitting its own markets, as a shutdown of major economic centers, such as Beijing and Shanghai, are putting pressure on raw materials and energy, but also will severely constraint already fledgling logistics and exports to OECD markets.
Without any doubt China is heading towards an historical oil demand shock, probably at the same level as during the first days of the pandemic in 2020. Total lockdowns are being put in place, which could result in the same situation as is in Shanghai. Beijing residents are already confronted by severe virus testing measures. Lower demand could lead, as some are expecting, to more bearish sentiment in oil and gas.
China’s former high demand, partly even caused by the availability of cheap Russian and Iranian oil, is now being threatened. If real demand destruction comes to play, global oil markets are looking at higher supply volumes, while demand is fledgling. At the same time other supplies is expected to come back on-line, such as Libya’s output. The latter was hit last week by unrest and strikes, but seems now to be reopening its shuttered fields Sharara and El Feel. If all is stable, around 600,000 bpd could be returning back to the market soon.
Chinese refineries are already reported to have cut operating rates significantly. Reports have indicated that China’s main state-owned refiner Sinopec has cut its operating rates by 18% the last weeks. Lower demand in Asia could be a positive development for other markets, as it will be removing some of the tightness in refining products. Middle distillates are currently still under pressure, as inventories are very tight. When looking at gasoil stock in ARA (Amsterdam-Rotterdam-Antwerp) it is still at the lowest levels since 2008.
Metals and raw materials hit
As already has been seen in major European energy industries, such as metals, steel, aluminum or fertilizers, demand destruction is in place. China’s lockdowns, even if not directly related to energy issues, also will lead to shutdown of production. Prices of base metals and minerals are already showing severe headwind. The Shanghai Metals Market (SMM) reported that operating rates of aluminum semi-fabricators are down. Raw material supplies in China are also being severely disrupted.
Oil markets looking for direction
Demand destruction is making headlines, but the outcome is still unclear. Norwegian energy consultancy Rystad Energy stated that Chinese lockdowns and high oil prices are expected to lead soon to 1.4 million bpd of lower demand. Global inflation and economic unrest are also playing up. China and high prices are not going to be a positive combination most agree.
Still, there are some other factors at play that are not yet being analyzed totally. Potential EU sanctions on Russian oil and gas, as Brussels is discussing it currently, could remove several million barrels from the market. International traders are currently very hesitant to buy Russian volumes, as political and societal pressure, but also a Sword of Damocles called sanctions, are putting up severe obstacles. The impact of a Russian sanction regime is still to be seen, but it could lead to upward price pressure if no clients are being found.
At present, EU sanctions are already biting into Russian oil production. Bloomberg’s Javier Blas stated that overall Russian oil production is down by 10%. Overall, the latter could be a stabilizing factor for prices in general, as lower Asian demand will be countered by less Russian exports. If however, as American financials are warning, EU sanctions are really going to be bite, crude oil prices could be showing price hikes above $150 per barrel, some even indicate $180.
Markets are in limbo, as long as short-term COVID lockdowns are combined with potential Russian energy sanctions. Demand destruction is in place already, but still in real terms not making a dent in demand yet. With the holiday season coming, and looking to current surge in air-travel in Europe, lower oil prices are not to be expected yet.