China faces its biggest annual drop in oil demand in more than three decades as Covid-19 lockdowns and a property crisis weigh on growth in the world’s No. 2 consumer, the International Energy Agency said.
Chinese oil demand will decline by 420,000 barrels a day, or 2.7%, this year in the first annual drop since a 1% retreat in 1990, the Paris-based adviser said. The pullback that year is the only previous retreat in IEA records dating back to 1984.
The country has re-imposed restrictions as part of a Covid Zero strategy, with lockdowns hitting locations like megacity Chengdu, with 21 million inhabitants. Meanwhile, home prices have fallen for 11 straight months despite government relief efforts.
The projected decline in China prompted the IEA to trim global oil demand forecasts in its latest monthly market report. The country has been the engine of world oil consumption during the past two decades, managing to expand even during the 2008-2009 financial crisis and 2020 pandemic, according to IEA data.
“For now, a deteriorating economic environment and recurring Covid lockdowns in China continue to weigh on market sentiment,” said the agency, which advises most major economies.
World oil consumption will increase by 2 million barrels a day this year — about 110,000 a day less than previously forecast — to average 99.7 million barrels a day, the IEA said. Demand will expand by about the same amount in 2023, it said.
Crude futures have tumbled almost 25% over the past three months — trading near $93 a barrel in London on Wednesday — on signs of a global economic slowdown.
With the economic backdrop darkening, the OPEC+ alliance of producers led by Saudi Arabia has pivoted from increasing supply back to tightening it, and signalled that it could make further cutbacks in the months ahead.
The Chinese downturn is being partially offset by “robust” use of oil in many countries for power generation, as they switch away from costly natural gas, the IEA said. About 700,000 barrels a day will be absorbed by this in the fourth quarter and in early 2023, double the levels seen a year ago.
Still, the agency noted a split between markets for crude oil — which face a projected surplus of 1 million barrels a day in the second half of the year — and the refined products used by consumers.
Overall oil supplies have been maintained as IEA members like the US release emergency stockpiles, and as Russian exports prove surprisingly resilient to an international backlash following the invasion of Ukraine, the agency said.
Yet supplies of diesel, used for trucks, and jet fuel remain “exceptionally tight,” it said. Diesel markets have been constricted as China and India limit exports.
Oil markets generally could still be tightened in the months ahead as European Union sanctions on Russian sales take effect in early December, the agency cautioned.