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China’s growth in oil demand to sustain crude prices at $95-110 per barrel, experts say

The main sectoral regulators estimate the rise in China’s crude demand at around 500,000 barrels per day in 2023

MOSCOW, January 31. /TASS/. The removal of pandemic-related restrictions in China has created major uncertainty on the already-volatile global oil market, with the key question being how strong the growth of oil demand will be in this country this year and what influence it will have on oil futures amid restrictions against Russian oil.

Experts interviewed by TASS offered varying assessments as to how the situation would influence the global oil market, though they are confident that the growth of China’s oil consumption will keep oil futures high.

The main sectoral regulators estimate the rise in China’s crude demand at around 500,000 barrels per day in 2023. The Energy Information Administration in the US projected 530,000 barrels per day in its January forecast. OPEC anticipates an increase of 510,000 barrels per day. Secretary General Haitham Al Ghais has said that the cartel remains cautiously optimistic on the prospects of oil consumption growth in China.

InfoTEK’s expert and deputy head of the Institute of National Energy Alexander Frolov mentioned two factors behind the current forecasts on China.

"The forecasts for demand growth in China rely on two assumptions. The first assumption is that China will return to the usual growth rate of demand, that stands at 0.4-0.5 mln barrels per day annually. The second assumption implies pent-up demand in China, meaning growth ‘on its own and for that guy’. In other words, in 2023 the People’s Republic of China will first catch up with the 2022 lag, and later it will shift to its planned growth. Both options seem equally possible now since we do not know whether there will be new anti-coronavirus restrictions in China," the expert said.

Air service to drive consumption growth in China

Kirill Rodionov, an expert from the Institute for the Development of Technologies in the Fuel and Energy Complex, believes that the removal of pandemic-related restrictions will first of all trigger international air service in China, whose decline due to COVID-19 affected the total dynamics of air traffic in Eastern Asia.

According to figures provided by the International Air Transport Association (IATA), revenue passenger-kilometers (RPK) on international flights in Eastern Asia in November 2022 were 50.5% lower than in November 2019. Meanwhile, in China’s domestic air service segment, the difference was 70%. Principal Director on Energy Studies at the Institute for Energy and Finance Alexey Gromov shares the view.

"The removal of pandemic-related restrictions will result in a slight recovery of business activity in the country, pushing oil demand up, particularly in the segment of air service that was almost frozen. The growth of oil demand in China is currently estimated at 500,000-700,000 barrels per day additionally, though there is no talk so far about this increase dramatically changing the balance of forces on the global oil market," Gromov explained to TASS.

Oil surplus on the international market was estimated at around 1 mln barrels per day as of the end of last year, the expert noted.

"In other words, the growth of consumption of oil and petroleum products that we can expect from the Chinese economy today, will lead to the fact that there will be increasingly less prerequisites for maintaining oil surplus on the global market. And a stable supply shortage is likely in the second half of the year if OPEC+’s policy announced last November on sustainable monthly output reduction by 2 mln barrels per day persists, which may trigger some oil price hikes. What is currently going on in China will prevent oil prices from going down," Gromov thinks.

What will oil say?

Analysts at leading global agencies are convinced that a hike in China’s oil demand will push oil prices up. Global Head of Commodities Research in the Global Investment Research Division at Goldman Sachs Jeffrey Currie said in an interview with Bloomberg TV that the ‘opening’ of China could send Brent crude oil prices up to $110 per barrel. Morgan Stanley’s analysts agree, admitting that the oil price may soar to $100-110 per barrel by the second half of the year. That said, as the main reason Morgan Stanley names not the opening of China as such, but the contraction of reserves and the lack of free production capacities.

Morgan Stanley has said it expects the price of Brent to remain in the range of $80-85 per barrel in Q1. However, rising demand in the face of tight inventories and spare capacity will show that the supply ceiling is not far off, the investment bank said, adding that this could support Brent oil prices in the range of $100-110 per barrel by the second half of the year.

Meanwhile, BCS World of Investment Senior Analyst Ronald Smith told TASS that he expected the price of Brent to rise to $95 per barrel in the first quarter, and to decline to $85 per barrel by the end of the year.

Any way out?

OPEC+ nations will be able to boost crude production to necessary volumes, if China outpaces growth rates in demand, Frolov suggests.

"The risk to Europe’s supplies is created by the sanctions standoff with Russia. If the country is forced to cut production it may lead to a sharp surge in prices for some time. As of now Russian supplies have generally adjusted to the new supply chains. Though they will face another test after the petroleum products are embargoed," he explained.

Russia was the second-biggest oil supplier to China last year. Imports of Russian oil to the Asian powerhouse rose by 8% in the period to 1.72 mln barrels per day. All in all, Russia delivered 86.25 mln tons of oil. Frolov believes that Russia has opportunities for further crude supply hikes to China.

"In the short term, the increase of deliveries will be related to sea transport supplies to Asia of those volumes that had previously been delivered through pipelines to Europe. It is also possible that some suppliers will cut sales to China and India in response to Europe’s demand, which will result in a sort of exchange on the global market. In the short term, Russia may expand the ESPO oil pipeline, as well as tanker capacities in the Far East as demand in China will keep increasing," he concluded.