China’s Covid-19 reopening set to push 2023 oil demand to new high: IEA

LONDON: The lifting of Covid-19 restrictions in China is set to boost global oil demand this year to a new record high, the International Energy Agency (IEA) said on Wednesday, while price cap sanctions on Russia could dent supply.

“Two wild cards dominate the 2023 oil market outlook: Russia and China,” the Paris-based energy watchdog said in its monthly oil report.

“Russian supply slows under the full impact of sanctions (while) China will drive nearly half this global demand growth even as the shape and speed of its reopening remains uncertain.”

Weak industrial activity and mild weather helped cut oil demand by nearly a million barrels per day in the OECD developed countries in the last quarter of 2022.

But despite possible but likely mild recessions in Europe and the United States, China’s expected reopening is set to fuel rebounds in nearby Asian economies and see it take the lead from India as the world’s leader in oil demand growth.

Oil prices rose on Wednesday to their highest since early December on China optimism.

Brent crude futures were up $1.58, or 1.84 percent, to $87.50 a barrel by 1458 GMT. U.S. West Texas Intermediate (WTI) crude futures rose $1.83, or 2.28 percent, to $82.01. Both were at their highest since early December.

The IEA report followed a projection from the Organization of the Petroleum Exporting Countries (OPEC) for Chinese oil demand to grow by 510,000 barrels per day (bpd) this year after contracting for the first time in years in 2022 because of Covid containment measures.

But OPEC kept its 2023 global demand growth forecast unchanged.

Referring to China, PVM analyst Stephen Brennock said that "no other single entity will play a more significant role in shaping oil balances over the coming months".

But the chief of the world’s largest oil company is worried about global crude supplies.

Current market dynamics — such as China’s slowdown and an aviation sector that is still recovering from the Covid-19 pandemic — have kept demand relatively subdued, but that is set to change soon.

Saudi Aramco CEO Amin Nasser fears the world won’t have enough spare capacity to deal with that shift.

“For crude oil, we are in a situation where there is a spare capacity that is helping to mitigate interruptions,” Nasser told CNBC. “However, I am not so sure about the mid-to-long term, because as the spare capacity erodes, we will not be having the capability to mitigate any short or long term interruptions like what happened with Russia-Ukraine crisis.”

Aramco pumps about 10 percent of the world’s crude oil supply. It has a maximum capacity to pump 12 million barrels of crude per day, Nasser said, and is working on increasing that by a further million barrels per day. Still, he says, “We should be worried about the mid to long term. I think there will be an issue in meeting the growing demand.”

While Aramco is working on building additional production capacity, “I don’t think it is enough investment to bring additional capacity that will be needed to supply the market,” Nasser said. “It will not mitigate a situation where the demand is growing and offsetting the decline. You need additional investment elsewhere, globally, to meet global demand.”

Investment in hydrocarbons has decreased amid a focus on decarbonization, and government regulations in many countries discourage fossil fuel exploration and drilling.

Saudi Arabia and many of its partners in the OPEC producers’ alliance have repeatedly called for simultaneous investment in hydrocarbons and in the energy transition to avoid a future supply squeeze.

The looming supply-demand dynamic could bolster prices. Maarten Wetselaar, chief executive of Spanish oil company Cepsa, on Wednesday predicted that the crude oil price would return to triple-digits in the second half of 2023.

“Think about it this way,” Nasser said. “Today we have around 2 million barrels of spare capacity. The aviation industry is 1 million barrels below pre-Covid level. As [the] aviation industry picks up in 2023-24, that’s an additional 1 million barrels. [Consider] China opening up and that will really add a lot to the demand side.”

He stressed, “So all of these indicators now, without looming recessions — if economies start picking up and improving, that will also require additional supply. So you need additional investment to prepare for what’s coming.”