May 23 2023
After three years of stringent pandemic-related restrictions, China’s economy is back and is expected to drive global oil and gas demand. By Oceana Zhou and Cindy Liang.
China, finally unleashed after three years of stringent COVID-19 restrictions, is expected to drive global oil and gas demand growth in 2023.
S&P Global Commodity Insights forecasts global oil demand to grow by 2.1 million b/d in 2023, and around 40% of this is expected to come from China, assuming the country’s GDP rises by 5.3%. China is also estimated to contribute 84% of the 7.9 Bcm or 1.4% year-on-year growth in global natural gas demand.
China’s first-quarter GDP growth stood at 4.5%, according to the National Bureau of Statistics, stronger than the 2.9% growth in Q4 2022 and higher than the market consensus of 4%.
"We expect China to see a 6% oil demand growth in 2023, but we need to be aware of the uneven recovery from different end-users, with a slower growth pace in H1 than in H2," said Zhuwei Wang, Asia oil analytics manager at S&P Global. He added that services — especially catering, tourism and transportation — are rebounding sharply due to the strong leisure demand after three-year controls, but the industry and manufacturing sectors are lagging amid slow exports.
GDP growth in the tertiary sector rose 5.4% year on year in Q1 from 2.3% in Q4 2022, with the volume of passenger turnover jumping 61.8% on the year in the first three months, NBS data showed.
These indicators were also reflected in stronger transportation fuel demand recovery among oil products, with gasoline and jet fuel rising about 320,000 b/d and 180,000 b/d, respectively, in Q1 from Q4 2022, according to S&P Global estimates.
Transportation demand for gasoline, jet fuel, gasoil, bunker fuel oil and LPG generally accounts for 48% of China’s oil product consumption. S&P Global estimates 2023 demand from the transportation sector to rise 8.6% on the year.
Industrial production grew 3% year on year in Q1, only slightly faster than the 2.4% increase in the previous quarter. Fixed asset investment growth in March was 4.8% year on year, down from 5.5% in January-February, due to slow growth in the property, infrastructure and manufacturing sectors.
"We see fairly modest growth in industrial production as a result of the drag imposed by weakening external demand in the US and Europe," financial institution ING said in an April 18 report.
Oil consumption from industry, mainly gasoil and light ends as feedstocks for petrochemical production, accounts for about 35% of China’s oil demand. S&P Global projected China’s 2023 industrial demand to grow about 4% on the year.
China will not regain its position as the largest LNG importer in 2023 due to demand constraints, said Jenny Yang, senior director for gas, power and climate solutions at S&P Global.
"The end of the zero-COVID policy in December 2022 promises an economic rebound, with stronger energy and natural gas demand to follow. However, multiple factors are expected to limit Chinese gas and LNG demand growth in 2023 to single digits instead of the double-digit levels seen in the recent past," Yang said.
Based on S&P Global’s forecast as of end-April, China’s natural gas demand is estimated to rebound by 7% year on year in 2023. The country’s apparent natural gas consumption was about 366.3 Bcm in 2022, down 1.7% on the year. This was the first year-on-year decline on record, according to data from China’s National Development and Reform Commission.
"Economic recovery will still be under pressure from the real estate market downturn and weak export demand," Yang said. "Current policy priorities are economic growth stability and energy supply security. The coal-to-gas policy, the key driver behind Chinese gas demand growth in recent years, is no longer a top priority given the higher cost of natural gas compared with alternatives."
In order to ensure the stability of energy supply and achieve the country’s decarbonization goal, more domestic coal and renewable resources will be made available for energy consumption this year. Analysts said this move will also cap the growth of natural gas demand.
Chinese LNG imports are anticipated to rebound as well in 2023, but are expected to rise by only 5 million mt year on year, with most of the growth coming from new long-term contracted volumes, according to S&P Global’s forecast.
Nonetheless, China will remain a key swing factor in the global LNG market. Yang said uncertainty in China’s LNG demand stems from economic growth, particularly industrial activities, as well as spot price levels, government policies and even the weather.
"LNG imports may represent only 3% of China’s energy consumption, and spot LNG purchases much less than 1% of total energy demand, but China’s LNG demand and spot purchases could have a significant impact on global trade," she added.
Rising Russian imports
Domestic production growth and the Power of Siberia gas pipeline will add more lower-priced gas supply to the domestic market, which is expected to limit LNG demand.
China’s natural gas production is expected to reach 234.6 Bcm in 2023, up 5.4% on the year, state-owned oil and gas company CNPC’s Economics & Technology Research Institute said.
Natural gas inflows via the Power of Siberia pipeline, the Russia-China eastern route, are expected to reach 22 Bcm in 2023, 30 Bcm in 2024 and 38 Bcm in 2025, from 15.4 Bcm in 2022, according to the supplier Gazprom. With deeply discounted oil and Moscow’s closer diplomatic relations with Beijing, Russia has become a key source meeting China’s growing appetite for imported crudes.
China’s imports of Russian crude oil jumped 12.9% to 2.27 million b/d in March from the previous record in February, data from the General Administration of Customs showed. It also marked the first time a single supplier’s monthly crude deliveries to China crossed 2.2 million b/d, against the previous monthly high by a single supplier of 2.17 million b/d, GAC data showed.
The cost of Russian crude imports averaged $72.30/b in March, $1.23/b lower than $73.53/b in February, while cargoes from Saudi Arabia averaged $82.22/b in March.
As a result, crude imports from Russia surged 32.7% or 508,000 b/d on the year to 2.06 million b/d in Q1, while the country’s total crude imports hit 11.11 million b/d in the same period with a 6.3% or 694,000 b/d year-on-year increase, GAC data showed.
Still, there are multiple factors at play that could eventually change the direction of China’s appetite for oil and gas demand balance for the remainder of 2023. The way of the dragon remains unpredictable.
Article included in Commodity Insights Magazine. View full issue