China expected to account for 40% of this year’s oil demand recovery

(C) Reuters. FILE PHOTO: An aerial view shows a crude oil tanker at an oil terminal off Waidiao island in Zhoushan, Zhejiang province, China January 4, 2023. China Daily via REUTERS

By Rowena Edwards

LONDON (Reuters) – China is expected to account for around 40% of the increase in global oil demand this year as its economy emerges from strict lockdowns, but the increased use will not take prices back to 2022 levels, consultancy Wood Mackenzie said on Thursday.

In a base-case scenario, China’s economy will grow by 5.5% this year after it lifted its COVID containment strategy, WoodMac said in a report.

This would equate to 1 million barrels per day (bpd) of a 2.6 mln bpd increase in global oil demand this year.

A high-growth scenario, under which China’s GDP rises by 7%, would add a further 400,000 bpd of Chinese demand, the report said.

This year’s average price of Brent crude oil, however, would remain below the $99/bbl average seen in 2022 as “markets have now adapted to the chaos brought about by Russia’s war on Ukraine,” the report said.

Barring a significant recession, WoodMac sees Brent rising from current levels of around $75/bbl, to average $89.40/bbl this year. The higher GDP growth scenario in China would add up to $5/bbl.

Following this month’s market turmoil in the banking sector, the group said it did not see any major changes to fundamentals of supply and demand and expects oil prices to recoup losses, Mark Williams, WoodMac’s research director for short-term oils, told reporters at a briefing.

Global refining margins are set to decline to around $6/bbl in the fourth quarter compared with $11/bbl a year earlier, WoodMac said, as additions to global refining capacity outpace demand growth for transport fuels.

The higher GDP growth scenario would lower China’s exports of gasoline, jet, diesel, and gasoil as domestic consumption rises, supporting global refining margins by a further 50 cents/bbl in the fourth quarter, the report found.

“We have over 2 mln bpd of [refining] capacity coming online this year. Losing an additional 100,000 bpd of China exports my not be the end of the world,” Williams said.

The consultancy expects diesel profit margins to crude to average $30/bbl in the fourth quarter, while gasoline is expected to average around $5-6/bbl, Williams said.