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New COVID-19 cases look to weaken China's oil demand recovery in Sep

Highlights

Platts Analytics cuts Sep demand projection by 200,000 b/d

May further lower estimates: analysts

Eased controls possible after congress, but zero COVID-19 to remain

A spate of new COVID-19 cases in China may weaken oil products demand growth during the typical consumption peak season in September and October ahead of the 20th Communist Party congress.

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Analysts in Beijing, Shenzhen, London and Singapore have lowered their key oil products demand estimates by up to 300,000 b/d for the months. However, they did not expect prolonged month-long lockdowns, as seen in Shanghai in April, would repeat.

The adjustments would lead to a year-on-year reduction of at least 96,000 b/d of oil demand for 2022, analysts said Aug. 31-Sept. 1.

China reported 2,057 new infections Aug. 31, of which 368 were symptomatic and 1,689 asymptomatic, the National Health Commission said Sept. 1. In comparison, the number of new infections stood at 393 on July 31.

Chengdu city, a rising economic center in southwest China, and the Nanshan district in the country's third biggest city Shenzhen, announced lockdowns Sept. 1 for four days till Sept. 4. This followed some scattered residence lockdowns in Guangzhou, municipalities Chongqing and Tianjin, as well as provincial capital cities Wuhan and Shijiazhuang.

The government has been ramping up COVID-19 curbs again since the end of August to prevent infections from going out of control ahead of the party congress to be held in Beijing Oct. 16.

"Local governments learnt the lesson in Q2, taking quick action to impose pandemic restrictions decisively at an early stage. However, we are unlikely to see prolonged lockdowns that damage the economy," a Shenzhen-based analyst with an international research agency said, adding, "with the zero COVID-19 policy bringing more uncertainties, we do foresee huge challenges to a smooth recovery, and thus would want to raise concerns on further downside risks to our current outlook in the event of an escalation of the outbreak."

Meanwhile, "impact of this wave is not as strong as that in Shanghai in April, because cities like Chengdu hold a much smaller stake than the financial center in the country's oil demand, oil production and transportation businesses," Sun Sijia, an analyst with Platts Analytics, said Sept. 1.

Platts Analytics lowered Aug. 31 its projection on China's oil demand by 200,000 b/d to be at 16 million b/d for September from the previous estimation made a month ago. In comparison, demand was at a 2022 low of 13.2 million b/d in April when Shanghai was locked down for a whole month.

Energy Aspects has cut demand estimates by 300,000 b/d on average for August and September due to short-term droughts and power shortages in August and the new wave of the pandemic, it said in a report Aug. 31.

Monthly growth to remain

Nevertheless, analysts continued to see a month-on-month demand increase of about 800,000 b/d in September, considering it is the peak season for gasoil consumption in fishing, autumn harvest and construction.

"Such activities are the must-dos in the season, supporting an increase on the month in gasoil demand," a Beijing-based analyst said.

China's fishing bans in different seas would end by Sept. 16, driving up gasoil demand for bunkering of fishing boats. Construction activities would rise amid cooling weather conditions with gasoil as the fuel for equipment, while industry production may improve to meet annual targets, which would boost transportation demand.

Also, "gasoline consumption would be supported by regular rides as schools start on Sept. 1, holiday trips during the Mid-Autumn Festival Sept. 10-12 and National Day Oct. 1-7, despite COVID-19 controls that may have some impact on cross-provincial trips," Sun said.

Platts Analytics expected China's total oil demand in September to increase about 700,000 b/d from 15.3 million b/d last month and kept its projection for October unchanged at 16.2 million b/d unless wider or longer lockdowns are imposed.

Some analysts, however, have decreased October demand forecasts in line with September reductions, by up to 300,000 b/d.

"We expect the government will tighten COVID-19 controls a bit to avoid a surge in infection numbers, leaving the party delegates, governors and people to focus on the congress," a Singapore-based analyst said, and added that some travel restrictions during the National Day holidays may be enforced as the congress will be held soon after.

Gloomy outlook

Virus control measures was the biggest threat facing a Chinese oil demand recovery, analysts said. The trend of seeing a year-on-year oil demand reduction in 2022 is unlikely to change even with relaxations in movement controls after the party congress, they added.

They expected the country's annual oil demand to fall 95,000-260,000 b/d from 2021.

"The recent resurgence proves earlier concerns that the government's relaxation in COVID-19 containment measures for economic growth since the end of June could be unsustainable," the Shenzhen-based analyst said.

"There will be some adjustments to relax some of the COVID-19 measures in line with the virus changes in October, following decisions made during the congress. But I think China will keep its zero COVID-19 policy to ensure sufficient medical resources for severe cases," said a source with Guangzhou's public health authority.

Sinopec, the world's top refiner by capacity, has cut its throughput target for the second half to 4.79 million b/d, down 2.2% from 4.9 million b/d in the first half and down 7.2% year on year, suggesting a slow recovery in domestic oil demand.