Crude oil: Chinese demand is heading for the light

China is the engine of global crude oil consumption growth, with an average growth rate of 6.
3% in the past 30 years, far higher than the world average of 1.
04%.

Since its own production is far from enough to meet demand, China's dependence on crude oil imports is more than
70%.

After the deregulation of the epidemic, the first wave of infection peaked and China's economic activity was severely affected in December, with all three PMIs falling to their lowest level since March 2020 and sluggish terminal demand
.
Last year's decline in travel dampened demand for gasoline and kerosene, while diesel diverged from the previous two
.

In the post-pandemic era, the international market has great confidence in China's crude oil demand, and the IMF expects China's economic growth to be "thriving"
in 2023.
However, the reduction of crude oil import quotas and the increase in export quotas of refined and chemical products in the first quarter of 2023 reflect the domestic inventory pressure of crude oil and refined products, and optimism expects China's demand to recover
substantially by the second quarter.

First, the current situation of China's crude oil supply and demand

1.
1 China is the engine of global crude oil consumption growth

China's oil demand ranks second in the world, according to the latest OPEC data (December monthly report), China's crude oil consumption is 14.
79 million barrels / day, accounting for 15% of the world's crude oil consumption, second only to the first ranked United States, and the United States average daily consumption of 20.
54 million barrels (accounting for 20%) is still a certain gap, but has exceeded the EU's oil consumption
.

As an emerging economy, due to the rapid economic development, China has maintained a high growth in crude oil consumption, with an average year-on-year growth rate of 6.
3% in the past 30 years, far higher than the world average of 1.
04%.

Therefore, as a major crude oil consumer, China's crude oil import policy, domestic refining and chemical start and terminal consumption will be transmitted from the impact of the demand side to the international crude oil market
.

1.
2 China's crude oil demand is highly dependent on imports

China is vast and rich in resources, but such resources as crude oil have certain endowments, and as of 2021, China's crude oil reserves are about 26.
5 billion barrels, accounting for only 1.
7%
of the world's proven crude oil reserves.
In recent years, China's crude oil production has increased year by year, but due to the low level of reserves, there is still a certain gap between mining technology and foreign countries, and it is difficult to significantly increase production
.
The average monthly output in 2022 will be 17.
15 million tons, an increase of 420,000 tons or 2.
51%
over last year.

Although the total demand of the United States exceeds that of China, since the outbreak of the shale oil revolution, the United States crude oil can basically achieve a balance between supply and demand, and only need to import a small number of special oils to meet the needs of refiners, but Chinese and European crude oil needs to rely on a large number of imports
.
Among them, China's crude oil imports rank first in the world, accounting for 24.
1% of the world's
total imports.

The low processing volume in 2022 is mainly due to the sluggish terminal consumption, and refining and chemical enterprises have reduced the operating rate
in order to reduce losses.
Last year's monthly crude oil processing volume was 55.
68 million tons, down 3.
2426 million tons year-on-year, a decrease of 5.
5%, still far higher than domestic crude oil production
.

Combined with China's crude oil production and imports, China's dependence on foreign crude oil has exceeded 70% since February 2018, and once reached 74%.

On the one hand, China's crude oil imports are used to meet the needs of processing and refining, and on the other hand, as a reserve of inventory to ensure the security of
oil supply.
Looking at implied inventory changes, crude oil inventories have increased by 107 million tons (about 770 million barrels)
since January 2020.

Second, China's crude oil demand is weak reality

The 2.
1PMI fell sharply, and sluggish economic activity dragged down crude oil demand

In December, the State Council issued the "New Ten Articles", which basically announced the gradual liberalization
of epidemic prevention and control in China's society.
Against this backdrop, the number of infections has risen rapidly nationwide, and socio-economic activities have been impacted
.

Recently, the National Bureau of Statistics released PMI data for December, and all three major indexes hit their lowest values
since March 2020.
The manufacturing PMI fell by 1.
0% to 47% month-on-month, the non-manufacturing PMI business activity fell sharply by 5.
1% to 41.
6%, and the Chinese composite PMI output index fell by 4.
5% to 42.
6%.

Labor-intensive enterprises, seriously affected by the spread of the epidemic, most enterprises implemented measures such as working from home, and the overall production capacity fell significantly, with the manufacturing PMI employee index falling by 2.
6% to 44.
8%, and the non-manufacturing PMI employee index falling by 2.
6% to 42.
9%, also hitting the lowest historical level
since March 2020.

2.
2 Terminal demand - the trend of gasoline, diesel and coal is differentiated

Looking back at the terminal consumption of crude oil in 2022 - the apparent consumption of refined oil, due to the spread of the epidemic in various places in the first half of the year, as well as the high retail prices of gasoline and diesel, people turned to "green travel", etc.
, multiple factors led to a sharp decline in travel and industrial demand, and the apparent demand for gasoline and diesel kerosene showed a downward trend overall
.

In the second half of the year, although some areas still implemented stricter lockdown measures, as the epidemic gradually entered the normalization, the development of the logistics industry had less impact, coupled with diesel export expectations, traders' willingness to stock up increased, driving diesel meters to rise, while terminal travel has always been sluggish, gasoline and jet coal meters need to run
weakly.

Third, China's demand is expected to be good in 2023

3.
1 The recovery of road and aviation is strong

Gasoline consumption is mainly driven by urban transportation, diesel is highly correlated with truck transportation and industrial development, and jet fuel demand should observe the recovery of the aviation industry
.

In terms of gasoline, at the peak of the epidemic in various places, the congestion delay index of Beijing/Shanghai/Guangzhou/Shenzhen/Wuhan fell by 38.
4%/30.
5%/30.
7%/28.
1%/28.
3%
year-on-year.
As the epidemic situation gradually peaked in various places, the year-on-year decline in overall congestion performance narrowed rapidly at the end of December, especially after New Year's Day, the congestion index of Beijing, Shenzhen and Wuhan turned positive year-on-year, and as of January 11, the congestion index of these three places increased by 3.
3%/6.
0%/11.
0
% year-on-year, respectively.
The overall urban traffic situation shows a "V-shaped" trend, and gasoline consumption will strengthen
in the short term, boosted by holiday travel and pre-holiday stocking.

Diesel demand is mainly affected by industrial and mining infrastructure and freight transportation, the first quarter is already in the off-season of diesel consumption, so after the peak of the epidemic, it is difficult to see a significant recovery in demand, it is expected that after the holiday, logistics and construction sites will resume work, diesel will start the upward rhythm
of demand.

In terms of kerosene, from January 8, 2023, the nucleic acid testing and centralized isolation measures for all inbound personnel will be canceled, and the 75% load factor limit for inbound flights and the regulations on circuit breakers will be abolished, and the market predicts that international flights will restart
on a large scale.
Since January 2023, international and Hong Kong, Macao and Taiwan flights have basically continued the recovery trend since May last year, with an average of 208 international and Hong Kong, Macao and Taiwan flights per day from the 1st to the 12th, an increase of 70.
8%
over the same period in 2022.
It is expected that the recovery of the civil aviation industry will significantly increase the demand for jet fuel in the short term
.

3.
2 Grasp the pace of domestic demand recovery

In the short term, there is still pressure
on domestic crude oil to destock.
In 2023, China's first batch of refined oil export quota totaled 18.
99 million tons, up 46.
08% year-on-year, recently, the Ministry of Commerce issued the second batch of crude oil non-state trade import allowance in 2023 111.
82 million tons, the first two batches of a total of 131.
82 million tons, compared with the first two batches of 161.
72 million tons last year, a decrease of 29.
9 million tons or 18.
49%.

Lower crude oil imports and higher exports of refined and chemical products reflect domestic inventory pressure on crude and refined products, and optimistically expect a substantial recovery in China's demand by the second quarter
.

In its October report, the IMF predicted a further slowdown in global growth to 2.
7 percent in 2023, down 0.
2 percent
from its July forecast.
From the perspective of the world's major economies, China's economic growth in 2023 is "thriving", with GDP growth rate of 4.
4% year-on-year, an increase of 1.
2%
compared with 2022.
GDP in other economies has declined to varying degrees
.
Economic growth will lead to an increase
in demand for crude oil.

In the post-epidemic era, the international market has great confidence
in the demand for China's crude oil.
The recent rapid recovery of domestic traffic flow is mainly due to holiday travel, the relaxation of epidemic control, and the combined impact of the peak of the epidemic in various places, and the strengthening
of short-term fuel demand.
Follow-up still needs attention, in addition to the holiday effect, the substantial recovery of socio-economic activities in the second quarter boosted crude oil demand
.