China’s Lockdowns Are Removing At Least 1 Million BPD From Oil Demand

Key Highlights

• China’s April manufacturing PMI underlines the economic damage of its ‘zero-COVID’ policy
• This is causing the removal of at least 1 million barrels per day of demand for oil
• There is no reason to expect either the policy or its effects to change any time soon

 

As predicted by FX Empire nearly two months ago, a key driver for net lower crude oil prices in the coming months would be weaker demand from China due to its implacable determination to stick to its ‘zero-COVID’ policy. This has proven to be the case, as evidenced most recently in the worst set of benchmark manufacturing figures for two years, with the outlook unchanging and bearish for the foreseeable future.

More specifically, April’s official Purchasing Managers’ Index (PMI) – the key indicator that shows the state of the country’s manufacturing activity (with a reading above 50 showing an expansion and below 50 marking a contraction) came in at just 47.4 for the month. This is the lowest level since February 2020.

According to China’s own National Bureau of Statistics (NBS) senior statistician, Zhao Qinghe some enterprises have had to reduce or stop production, while many firms have reported an increase in transportation difficulties. “The production and operation of… enterprises have been greatly affected,” he added.

China Is Sticking To Its ‘Zero-COVID’ Policy

This data release follows a stepping up in the series of COVID-related lockdowns that have fallen on major Chinese cities, including most recently the economic powerhouses of Beijing and Shanghai, as analysed by FX Empire. These, in turn have disproven any theories that the government might relax its strict ‘zero-COVID’ policy in order that the damage to its economy might be minimised.

In practical terms for oil, these lockdowns have effectively meant the removal of the big global backstop big for oil that has come from Chinese demand over the past 25 years or so as a means for it to build-out its economy. In fact, China surpassed the US as the largest annual gross crude oil importer in the world in 2017, and became the world’s largest net importer of total petroleum and other liquid fuels in 2013, according to EIA data.

Oil Markets Are Losing At Least 1 Million BPD Of Demand From China

Specifically, says SEB’s Oslo-based chief commodities analyst, Bjarne Schieldrop: “The ongoing lockdowns in China are severe and Chinese oil demand is estimated to be roughly 1 million barrels per day softer due to this, and it is hard to see how China can escape this.”