The impact of China’s Covid lockdowns on oil prices

The recent rise in COVID-19 is thought to have led to hard lockdowns across China. This will cut output in the world’s second-largest economy this year, and the drop in oil consumption in China will hurt Asian crude demand growth and global prices in 2022.

According to consultants at Wood Mackenzie, almost all provinces in mainland China have implemented lockdown measures because of the coronavirus. There are many local governments that don’t want to cut back on containment measures even though there are fewer cases of the virus.

According to a statement they made on April 28, about 70% of China’s GDP comes from provinces that are taking steps to keep things safe.

Brent crude oil is traded on the spot market.

Analysts anticipate that, with consumers cutting down on spending and manufacturing activity slowing, China’s oil demand growth in 2022 would be flat compared to the previous year, with the danger of dipping into the negative. As a result, Asia’s overall crude demand growth in 2022 may be rather moderate.

According to Lim Jit Yang, an Asia-Pacific oil market analyst at S&P Global Commodity Insights, Asian oil demand growth is expected to slow down in 2022 because China’s demand has been affected by the return of COVID-19. Lockdown measures have been put in place in many large cities.

According to the most recent April forecast, China’s growth would be stable this year after increasing by 550,000 barrels per day in 2021.

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S&P Global’s Platts Analytics predicts that demand growth in the rest of the region will reach 713,000 b/d this year, up from 660,000 b/d in 2021. This is despite the high price of gasoline.

• Demand for crude oil in Asia is expected to rise.

• Global Commodity Insights from S&P

What effect does this have on prices?

Analyst Piero Cingari says that China consumes about 16 million barrels of oil a day, which is about 15% of the world’s crude demand.

He thinks that the spread of COVID-19 has had a negative effect on China’s oil demand projection.

There have been some negative effects on petroleum prices caused by the epidemic in Europe and the U.S., but these have been short-lived because of supply-side concerns, such as fears of a Russian embargo, and a rise in demand after the epidemic in these two countries, which use half the world’s oil.

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As a result, Wood Mackenzie’s Asia Pacific Vice-Chair Gavin Thompson and its Head of APAC Economics, Yanting Zhou, say that when the Ukraine crisis, inflation fears, and supply disruptions are all taken into account, the risk of commodity prices going up is high.

As long as the oil market is volatile, there is a chance that more and longer lockdowns could happen through May and beyond, which could hurt China’s oil demand and prices in the short term, they said.

According to Wood Mackenzie, China’s GDP would grow by 4.8 percent in 2022, falling shy of Beijing’s aim of 5.5 percent growth. Also, there is a lot of uncertainty in China, which is why the consultancy thinks global GDP will be down in 2022.