China is ‘last hurdle’ to recovery in oil demand

VSChina is seen by market analysts as the final hurdle to strong oil demand and while it’s hard to be positive for the first half of 2022, the second half could see a robust recovery.

Speaking at the Baltic Exchange Tanker Market Insights webinar during International Energy Week, Henry Curra, Global Head of Research at Braemar ACM Shipbroking, described China as the “only laggard in the system”.
He wondered how long China would be able to maintain a ‘no Covid’ policy and anticipated China opening up in line with other countries that have eased restrictions.
Additionally, oil prices above $100 a barrel are expected to lead to an OPEC opening, increased U.S. shale production, and a ramp-up in Atlantic Basin production, all of which will fill the gap. supply, Curra said.

Panelist Claire Grierson, head of tanker research at Simpson Spence Young (SSY), noted that there are still many challenges to China’s demand recovery. While China has been the main driver of oil demand for many years, SSY statistics show that last year Chinese crude import ton-miles were lower for the first time in about 20 years. .

“So if we were just looking at a demand outlook for a place like China, I don’t know if this year they’re going to get back to the import levels that we saw in 2020. It was a big year of building up inventory,” she said.

Grierson listed obstacles to Chinese demand recovery as independent oversight of refineries, reduced independent quotas and cleaner refining mandates due to the Beijing Olympics. “It’s a bit of a challenge, plus there’s the potential for a Strategic Petroleum Reserve (SPR) release.”

However, she saw potential for a recovery in imports as the market evolves throughout the year.

SSY calculated that major crude importers in the fourth quarter of last year, including China and India, saw imports down by around 2.5 million barrels per day in the fourth quarter of 2021 compared to to pre-pandemic levels. “We need to recover this volume; we are still suffering a bit from this low supply volume.

While China has been the main driver of oil demand for many years, SSY statistics show that last year Chinese crude import ton-miles were lower for the first time in about 20 years.

Supply changes
On the supply side, Grierson noted that OPEC+ has underperformed on production quotas, non-OPEC producers have been hit by pandemic price drops and energy majors operated with capital discipline. Here, the resumption of growth is not expected before 2023 and should come from Latin America, the United States and Canada. “I think it will be positive for the tanker market,” Grierson said. “Before the pandemic, what really helped boost the tanker markets was these ballast legs that we were getting for the biggest tankers that had to ballast from Asia in places like the Black Sea, in the Atlantic Basin, in the Gulf of the United States, in Europe, in West Africa.

“We didn’t see that, so we lost that tanker fleet inefficiency that had actually helped propel rates.”

Curra said while he recognized the supply issue, he pointed to the “interesting” inventory story. “This massively increases the sensitivity of the market to changes in demand. There is no buffer to cross and even if the demand is not very strong, you have a restocking which is very much needed, especially in the OECD. This, he continued, can add a large amount, whether by rebuilding SPR in China or by building up commercial stocks in the OECD – which could add more than 300,000 to 400,000 barrels of request per day.

Here, the resumption of growth is not expected before 2023 and should come from Latin America, the United States and Canada

scrapping incentives
Adding to the positive forecast forecast for the second half of 2022, Curra highlighted Braemar ACM Shipbroking’s bullish view for the withdrawal of vessels. “Even today, we have a lot of ships over 20 years old that are engaged in subterfuge trades and have no existence outside of those trades. If Iran were to come back, you would see a greater supply of oil and you would see the withdrawal of many, many tankers, which would be very, very positive.

More generally, there are plenty of tankers who struggle against the 17-18 bar. With recycling rates at a historically high level, there is a strong incentive for scrap metal workers.

Longer term, by 2027, Curra noted that IMO’s Carbon Intensity Index (CII) reporting requirements will be met – with the possibility of greenhouse gases being included in the CII – and ships ordered in the supercycle that began in 2007 will reach 20 years. . This will lead to increased recycling.

“There are a lot of short-term ifs. But longer term, I think it’s going to be very interesting,” Curra said. He added that he does not expect an increase in tanker orders due to the peak oil narrative and the yet to be confirmed requirements of the energy transition. “There are too many reasons not to commit to new construction, before you even start to consider the incredibly high prices. So I think we have a pretty constructive long-term outlook as well,” he said.
Source: Baltic Exchange

Steve R. Hansen