Oil markets may be overreacting to China's Covid news, Rystad says

Crude prices dropped nearly 4 per cent on Monday amid demand concerns

Traders work at the New York Stock Exchange. Brent crude, the international benchmark for oil, dropped nearly 4 per cent on Monday amid demand concerns. Reuters

The drop in oil prices in reaction to fresh lockdowns in China has been overblown as the effect on the country's short-term oil demand is likely to be minor, energy consultancy Rystad Energy said.

Oil prices have come under pressure over the past few weeks as China, the world's second-largest economy and biggest crude importer, battles a rising number of Covid-19 infections.

Brent crude, the benchmark for two thirds of the world’s oil, fell nearly 4 per cent on Monday after protests were reported in the country in response to a recent wave of lockdowns and restrictions.

"Oil markets may be misjudging news of China’s lockdown," said Claudio Galimberti, senior vice president at the Norway-based consultancy.

The latest curbs “appear to be mimicking previous ones, with nationwide road traffic only marginally affected while selected provinces undergoing comparatively severe lockdowns try to suppress Covid outbreaks”.

China's daily infection rate surged past 40,000 on Monday, weeks after the country showed the first signs of easing its zero-Covid policy by shortening quarantine times for travellers.

However, nationwide road traffic in the country has so far been “resilient” despite the latest round of lockdowns, said Rystad.

Country-level road traffic in the fourth week of November slid to 95 per cent of 2019 levels, from 97 per cent earlier, the consultancy's data showed.

Guangzhou, Chongqing, Beijing and Shijiazhuang recorded the largest declines in road traffic during the recent lockdowns, falling to between 75 per cent and 85 per cent of pre-Covid levels.

In April, China’s road traffic index dropped to about 90 per cent amid the large-scale Shanghai lockdown.

“Over the past few days, we have already seen a rebound in road activity as certain short-lived lockdown measures have been eased and the traffic index has thereafter climbed back to 98 per cent,” said Mr Galimberti.

Shanghai has not witnessed any slowdown in road traffic over recent weeks given the city’s less “heavy-handed” movement restrictions compared to its large April lockdown, he added.

Meanwhile, daily aviation activity has shown a “minor” dip over the past week, sliding to 33 per cent of 2019 levels.

“The relative scale of this downtick is rather small, given that Chinese aviation activity has been stagnating below 35 per cent already since mid-October,” said Mr Galimberti.

This month, both Opec and the International Energy Agency (IEA) again reduced their 2023 oil demand growth estimates, citing China demand concerns.

The Paris-based agency expects oil demand to grow by 1.6 million barrels per day in 2023, down from its previous estimate of 1.7 million.

Opec reduced its 2023 growth estimate to 2.2 million bpd, down 100,000 bpd from its previous forecast.

“Oil demand growth is anticipated to be challenged by uncertainties related to economic activities, Covid-19 containment measures and geopolitical developments,” Opec said.

Chinese crude imports rose to 9.8 million bpd in September, compared to August, but were still down 197,000 bpd from a year earlier, the Joint Organisations Data Initiative said.

Dubai’s Emirates, the world’s largest long-haul airline, expects a surge in global travel once China fully reopens to overseas flights, according to a Bloomberg report from last week.

“At some point, China will unleash demand for travel, the likes of which we will not have seen for a long, long time,” Emirates president Tim Clark was quoted as saying by Bloomberg.