(Bloomberg) — China is heading for the largest oil demand shock since the early days of the pandemic as the nation’s efforts to tame a rapidly spreading virus hobbles vast swathes of the economy.
Demand for gasoline, diesel and aviation fuel in April is expected to slide 20% from a year earlier, according to people with inside knowledge of the country’s energy industry. That’s equivalent to a drop in crude oil consumption of 1.2 million barrels a day, they said. It will be the largest hit to demand since the lockdown of Wuhan more than two years ago. The central Chinese city was the epicenter for the coronavirus pandemic.
The decline equates to about 9% of China’s daily oil demand when compared with the 2021 average. Gasoline will register the biggest hit, while jet fuel is coming off an already low base, said the Chinese oil executives who spoke on the condition of anonymity because they aren’t authorized to talk publicly. Though demand for diesel from the trucking industry has plunged, the agricultural and industrial sectors are offering some support, they added.
China — the world’s biggest crude importer — has been struggling to contain its latest outbreak that’s led to a series of lockdowns across the country, most notably in the financial hub of Shanghai. The nation’s pursuit of its Covid Zero strategy has resulted in a web of quarantine rules that’s crimped mobility and industrial output, snarling supply chains and weighing on fuel consumption.
Economists polled by Bloomberg have cut their growth forecasts for China once again due to the virus resurgence, while Chinese President Xi Jinping said this week that “we have yet to walk from the shadow of a once-in-a-century pandemic.” He also defended the lockdown-dependent approach.
China had successfully contained sporadic virus outbreaks since Wuhan but the highly contagious omicron variant has made it harder to quickly stamp out. The country is doubling down on its Covid Zero approach, while other nations are opening up and living with the virus.
Gasoline demand in eastern China has tumbled by about 40% this month, mainly due to the lockdown in Shanghai, said the Chinese oil executives. The city has vowed to step up enforcement of its restrictions after deaths rose.
Lockdowns are weighing heavily on the nation’s oil refiners. Top state-run processor China Petrochemical Corp., better known as Sinopec, along with the nation’s independent refiners in Shandong have been forced to slash operating rates as consumption cools. That’s led to swelling fuel stockpiles , prompting refiners to U-turn on fuel export plans and lobby the government for additional quotas to ship more products to overseas markets.
While China’s Covid battle has had some impact on oil futures, Brent crude has largely managed to hold above $100 a barrel since Russia’s invasion of Ukraine in late February. Morgan Stanley said the outbreak was a short-term headwind, and that a greater-than -expected supply deficit from Russia and Iran would boost prices. The bank raised its third- and fourth-quarter forecasts.
Chinese authorities have pledged to keep industrial and supply chains stable by removing obstacles in the logistics sector, Xinhua News reported this week. Consumption of road fuels in eastern China is expected to gradually recover in early May, with some high-frequency data showing an improvement already, the polled executives said.
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