China Watch: Export of Fuels Likely to Increase

Last month, lockdowns in China led to declines in the country’s industrial production, power generation, and retail sales by 2.9, 4.3, and 11.1 percent, respectively, compared to growing by 7.5, 4, and 6.7 percent in February. The unemployment rate of people between 16 and 24 years of age in urban areas rose to all-time-high at 18.2 percent.

The country’s manufacturing sector slid into a deeper recession, the lowest level since February 2020. Some sectors, such as the aviation industry, are suffering more now than two years ago: Chinese daily flight numbers have fallen to even lower levels in April than in February 2020.These numbers suggest that the Chinese economy is struggling with its biggest crisis since the pandemic first hit in early 2020.

To compare the impact of COVID lockdowns and the pathway to recovery, we indexed the monthly demand to January for both 2020 and 2022, which is a proxy for normal levels. In February 2020, fuel demand collapsed and later experienced a swift recovery to norm by August-September of that year. Though data has not been released for April 2022, we estimate that demand last month from January.

Demand is still under pressure this month, as Beijing has put more neighborhoods under lockdown, and Shanghai has not actually lifted mobility restrictions, despite the official statement that businesses had started reopening since mid-May. Nevertheless, according to government statistics, the number of provinces with high-medium risk areas – which means localized lockdowns – fell from over twenty last month to just seven currently.

Therefore, we expect some slight improvement of overall demand in May. Demand should return to a norm of 8.7 million b/d by the last quarter, but we caution that there is downside risk to this outlook due to the high rate of transmission of new variants and China’s increasingly extreme approach to control the virus. Currently, we expect a more gradual path to recovery and a weaker year-end rebound for fuel demand than occurred in 2020.

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