Oil demand growth for the Asian powerhouse forecast to contribute almost half of global growth

By Carly Fields
 

China's post-Covid economic recovery is being closely watched for its potential to uplift the global oil market. However, despite the country's efforts and OPEC+ supply cuts, the anticipated rise in crude oil prices has yet to materialise, according to Wood Mackenzie analysis.

Economists and oils specialists with the consultant discussed China's recovery and its implications for the oil market with Wood Mackenzie's chairman and chief analyst Simon Flowers.

While China's GDP outperformed expectations in Q1 by growing 4.5% year-on-year, the recovery has since lost steam, they noted. The industrial sector is grappling with inventory depletion, slowing down new production, while export demand for manufacturing goods remains weak due to the global economic slowdown.

Low consumer confidence across businesses and households is the primary concern, impacting the sustainability of China's rebound.

Flowers explained: "Consumer confidence is still well below 2021 levels, manifesting in weak demand for durable goods and caution over property purchases."


Growth forecast challenges

Wood Mackenzie believes that China's government target of 5% GDP growth for the year is not at risk. However, weaker-than-expected consumer confidence and demand for goods present challenges to its 5.7% growth forecast. The acceleration of growth is expected to be driven by services initially, followed by a pick-up in the property sector and construction in the second half.

Flowers emphasised: "Restoring consumer confidence and unleashing excess savings are the keys to accelerating China's recovery in H2."

To revitalise the economy, prompt government action is crucial, they said: “Government action is needed to get things going, and pronto.” While a 10-basis-point cut in the medium-term lending facility (MLF) policy rate sends a positive signal, it may not be enough to entice cautious consumers to spend more. Wood Mackenzie suggested that government-funded vouchers and discounts to subsidise purchases, along with improving employment prospects, could have a lasting impact on boosting consumer confidence.

China's recovery is described as “pivotal” for global oil demand growth in 2023.

“With much of the developed world on the verge of recession, China’s recovery is pivotal if the strong growth in global oil demand of the last two years is to continue into 2023 and 2024,” Flowers said.  

Wood Mackenzie forecasts China's demand growth at just over 1 million barrels per day this year, contributing almost half of the global demand growth. This would mark the second highest annual increase ever.

“While our overall forecast for China isn’t much changed over the last six months, the mix has,” Flowers said. “Personal mobility has pushed demand for transport fuels higher, offsetting downward revisions in the petrochemicals sector where new capacity has been slow to come onstream. Even so, a strong second half is required to meet our forecast and lift China’s oil demand to a new annual high of just under 16 million barrels per day.”


OPEC+ challenges

The strategic goal of OPEC+ is to balance the market and protect prices. However, with a two-paced global economy hampering demand in 2023, achieving this goal has proven challenging. The resilience of Russia's export volumes has been a significant factor affecting the supply side, Flowers said.

The recent decision by OPEC+ to extend existing cuts until the end of 2024, along with Saudi Arabia's additional one million barrels per day cut for July, underscores its commitment to strategic goals. Wood Mackenzie predicts that global demand will exceed supply in Q3 and Q4 2023, resulting in a significant implied drawdown of inventory.

The future course of action for OPEC+ hinges on demand. If growth aligns with expectations, there will be room for OPEC+ to gradually increase production, supporting Brent in the $80 per barrel to $90 per barrel range. Saudi Arabia, having shouldered the most significant production cuts, would be able to regain some of its previous market share.

Conversely, weak demand growth would present fresh challenges for OPEC+ in managing the market and price. Saudi Arabia would find it more challenging to regain lost market share without compromising the price recovery, the analyst said.

China's economic recovery plays a vital role in the global oil market. Wood Mackenzie's analysis suggests that restoring consumer confidence and leveraging excess savings are critical for accelerating China's rebound.

With China accounting for nearly half of global demand growth, its continued growth trajectory is crucial for the oil market.

The future path of oil prices and market stability will largely depend on China's economic signals in the coming months.

“In a recovering global economy, China holds the key. We will be closely monitoring the economic signals in the coming months,” Flowers said.