China’s rapid shift to reopen its economy following years of Covid-19 lockdowns should help oil demand rise to a record level this year, the International Energy Agency said Wednesday.
The energy watchdog lifted its forecast for oil-demand growth this year by nearly 200,000 barrels a day to 1.9 million barrels a day. The extra demand means that the IEA now expects total oil demand this year to average 101.7 million barrels a day, well above prepandemic levels and an all-time record amount.
Beijing’s rapid pivot away from its zero-tolerance approach to Covid-19 cases has largely taken the oil market by surprise and boosted hopes that China’s reopening could swiftly herald a rebound in the nation’s oil demand.
A similarly sudden turnaround for the fortunes of economies in Europe and the U.S. is also boosting oil-demand expectations, the IEA said. Europe’s economy is expected to fare better than first thought this year, as warmer temperatures have eased its energy supply crisis. Meanwhile, the Federal Reserve’s efforts to tame inflation have shown recent signs of success.
In its report, the IEA pointed to “a faster than anticipated reopening of China” and a somewhat improved economic outlook, as well as lower oil prices, as drivers of the raises to its oil-demand forecasts.
China’s demand for oil makes up most of the revision. The IEA raised its forecast for Chinese demand by 100,000 barrels a day to 15.9 million barrels a day.
A strong increase in demand for aircraft fuels as international travel recovers will account for almost half of this year’s increase in oil demand, the IEA said. Demand for jet fuels and kerosene, both of which are used as aviation fuels, is expected to rise by 850,000 barrels a day this year, following a similarly strong 2022.
China’s reopening will unlikely be a smooth path and its recovery of oil demand is not certain, the IEA cautioned, pointing to “massive underreporting” of Covid-19 cases and a weak economy. Oil demand would depend on Chinese households spending more: a tough ask given the state of their finances, the IEA said.
“Hardship and disruptions therefore look set to prevail in the near-term. As China faces a challenging winter, its exit path will unquestionably be bumpy and drawn-out,” it said.
In a separate report Tuesday, the Organization of the Petroleum Exporting Countries held off from making adjustments to its demand forecasts, cautioning that China’s reopening could spur a flare-up in Covid-19 cases which could delay a rebound in crude demand.
The stronger economic outlook for Europe is also not entirely positive for oil demand, the IEA said. High natural-gas prices and reduced gas supplies from Russia had in recent months boosted expectations that European nations would need to burn more crude-derived heating fuels to compensate for gas.
Last month the IEA had raised its demand forecasts on those expectations. But it said Wednesday that the extra demand would be around 200,000 barrels a day less than expected last month as warmer-than-usual temperatures experienced in Europe so far this winter meant fewer European utilities were switching from natural gas to oil.
The Paris-based agency kept its estimate of 2022 oil demand largely unchanged at 99.9 million barrels a day.
Write to Will Horner at [email protected]