The U.S. is looking shaky, but the world’s largest energy consumer is still in the early stages of its post-Covid recovery
By guest author Nathaniel Taplin from the Wall Street Journal.
Russia and members of the Organization of the Petroleum Exporting Countries dropped another bombshell on global markets this past weekend—an additional planned production cut of 1.66 million barrels a day starting in May. Brent oil prices promptly spiked 6 %.
The move by major oil exporters may reflect concerns about global demand, but signals emerging from China—the world’s largest crude importer—strongly suggest that its recovery in oil demand has further to run. That will help underpin global oil prices even if U.S. demand weakens significantly. And a larger bump in Chinese demand is still likely later this year as China’s property and tourism sectors find steadier footing.
China hasn’t yet released its main March industrial data, meaning crucial direct gauges of demand such as refinery runs aren’t yet available. But the health of the two main sectors driving oil consumption—transport and housing-related heavy industry—are now quite clearly on the mend, and the pace of improvement is accelerating.
China’s official March nonmanufacturing purchasing managers index clocked in at 58.2, which was its highest since 2011. The PMI was over 60 for road, rail and air transport, notes Pantheon Economics. The separate service sector gauge from IHS Markit and Caixin painted a similar picture: it hit 57.8, its highest since June 2020.
Moreover both the air and highway passenger transport sectors clearly still have room to run. In passenger-kilometer terms, domestic air traffic was still only at about 75% of late 2019 levels in February, while highway passenger traffic was only at about a third of prepandemic levels, according to figures from data provider CEIC.
The housing market and energy-intensive heavy industrial sectors look less ruddy, but they are still clearly improving. Housing floor space completed rose year over year for the first time since 2021 in the first two months of 2023 and steel production rebounded sharply. Housing space sold still edged down by 0.6%, but that was the smallest dip since mid-2021. China’s housing market rebound is still at an early stage. By late 2023, it seems likely to be a more significant factor supporting oil prices.
The recent USD 5 a barrel jump in global prices isn’t likely to put much of a dent in Chinese oil demand either. For one, Chinese diesel and gasoline prices still benefit from some residual price controls—meaning they reflect moves in global benchmarks only with a lag and not always in full. Given the clear shift in Beijing’s policy orientation toward growth this year, Chinese refiners are very likely to have to eat some of the cost of rising crude prices should Beijing conclude that high energy costs are starting to constrain the recovery.
The benefit won’t be extreme, though—there is no Chinese housing-led commodities bacchanal in the offing this time. Some of the damage of the past few years to the housing market will persist, and stimulus measures in 2023 have been cautious so far. But the nation’s oil demand will continue to rebound throughout the year. That makes significantly lower prices quite unlikely, even assuming a further downshift in U.S. growth.
Appeared in the April 7, 2023, print edition as ‘OPEC+ Cut Won’t Throttle Chinese Oil Demand’.