- China’s reopening from the zero-COVID policy has traders waiting to see the country’s oil demand surge
- The Asian country increased purchases of Russian oil, anticipating domestic demand
- Travel activity increases in China, indicating a return to pre-pandemic levels
- However, industrial activity still lags, keeping demand from reaching previously expected oil-consumption levels
Since China ended its zero-COVID policy, traders have been waiting to see when China’s oil demand will start to surge. Many of the oil price forecasts for 2023 were predicated on a major increase in oil demand from China. Analysts expected prices to rise to the triple digits, largely based on rising demand from China.
However, oil prices have remained range-bound this year, with WTI trading between $72 and $82 per barrel and Brent between $77 and $90 per barrel, as China’s oil demand has not yet surged.
Earlier in the year, I argued that we are more likely to see China’s oil demand increase gradually. Now that China’s COVID wave has peaked, there are signs that China’s oil demand will soon recover to pre-2020 levels, but not all the indicators are so positive.
China Buys More Russian Oil
China has always been an important buyer of Russian oil, but recently China has increased its purchases of Russian oil. According to Reuters, China doubled its purchases of Urals blend oil during the first half of February, as compared to the month prior.
This can’t be due to a desire to stock up before Russia cuts production in March because these purchases had to have been ordered before Russia announced its plan to cut production. However, China could be anticipating an increase in domestic demand in the coming months, prompted by heightened economic activity.
Travel Activity Increasing
Assessing economic activity in China is challenging for January and February because China doesn’t publish official data for those months due to the Lunar New Year. However, mobility data from road travel and public transportation showed that economic activity in major cities in China is increasing. More people were on the roads in major cities last week since the start of 2023, and more people have used the subway in these cities since before the pandemic.
Restaurant dining, entertainment, and shopping also increased, indicating China is finally returning to pre-pandemic travel and commerce patterns. This seems to indicate a return to pre-pandemic levels of consumer demand for gasoline and diesel soon.
Industrial Activity Still Lags
Chinese consumer data indicates that purchases of big-ticket items like cars and homes are not rebounding and are continuing to decline. As a result, demand for industrial materials, such as steel and cement, remains depressed.
China’s industrial activity should pick up, but the data seem to indicate that this will take longer than consumer activity. Traders should, therefore, not expect to see oil demand in the industrial sector returning to pre-pandemic levels as quickly as consumer demand.
Disclosure: The author does not own any of the securities mentioned in this article.