China's Oil Demand: Poised for a Significant Rebound?

A Brief History of China's Economic Expansion and Oil Demand

China's remarkable economic growth since the mid-1990s has been a major driver of a supercycle in crucial commodities, including oil and gas. In 2013, China became the world's largest net importer of petroleum and other liquid fuels. By 2017, it had overtaken the U.S. as the largest annual gross crude oil importer globally. This momentum, however, was significantly disrupted in late 2019 due to the Covid-19 pandemic and the stringent 'zero-Covid' policy, which led to the complete shutdown of major economic centers. However, in 2023, China managed to reach its official GDP growth target of around 5 percent, sparking questions about whether this growth will continue and its potential impact on oil markets.

China's Q1 GDP Figure and Its Implications

On 16 April, China's National Bureau of Statistics reported a year-on-year increase of 5.3 percent in the country's Q1 GDP figure, surpassing analyst expectations of 4.6 percent. This figure also marked an increase from Q4 2023's 5.2 percent. The decline in the property sector was offset by policy support and investments in other sectors, particularly manufacturing and energy production and supply. This strong performance suggests that an economic recovery is underway, with the manufacturing purchasing managers' index (PMI) also showing promising signs of expansion.

Post-Covid Growth and Its Impact on Oil Prices

China's economic recovery after Covid-19 was primarily driven by reopening the economy and removing negative policies, rather than aggressive stimulus. The country's growth was led by household consumption, mainly services, due to pent-up demand and savings. However, the increase in oil demand during this period was not sufficient to significantly drive up oil prices. This was largely due to China's continued purchase of oil from Russia at discounted prices.

China's Economic Transitions and Their Impact on Oil Demand

China's economic growth model has undergone several transitions since the 1990s, each of which has had a significant impact on its demand for oil and gas. Much of China's economic growth from the 1990s to the mid-2010s was based on a massive, energy-intensive expansion of its manufacturing capabilities. This period also saw a mass migration of workers from rural areas to cities, necessitating a significant energy-intensive infrastructure build-out. Even as China's growth began to shift towards less energy-intensive service sectors, its investment in energy-intensive infrastructure remained high.

China's Oil Purchases and Their Impact on Global Oil Prices

While China's post-Covid growth phase seems to be driven by several sectors, including manufacturing, it does not necessarily mean that oil prices will feel the full effects. This is primarily because China continues to purchase oil at significantly reduced prices from Russia, Iran, and Iraq. This practice, despite sanctions on the first two countries, helps lower demand elsewhere in global energy markets, thereby reducing bullish price pressure. Moreover, China does not want to encourage higher oil prices in Middle Eastern countries, as the U.S. and several of its key allies remain China's major export customers.

The Ramifications of Rising Energy Prices

Rising energy prices have direct implications for U.S. presidential elections, a factor that China does not want to be seen influencing. Estimates suggest that every $10 pb change in crude oil prices results in a 25-30 cent change in the price of a gallon of gasoline. This, in turn, can have a significant impact on consumer spending and the U.S. economy. Historical data indicates that the sitting U.S. president has a higher chance of winning re-election if the economy is not in recession within two years of an upcoming election.

Closing Thoughts

While China's oil demand appears poised for a significant rebound, the impact on global oil prices remains uncertain due to various factors, including China's oil purchasing practices and the potential implications of rising energy prices. What are your thoughts on this matter? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.