China's April Oil Demand Sinks to Two-Year Low

Widespread Covid-19-related restrictions sent China's apparent oil demand tumbling in April. A recovery may follow as authorities start to relax restrictions, but persistently high crude prices could limit the extent of any rebound.

China's April apparent oil demand fell by 8.6% from March to 12.74 million barrels per day, according to Energy Intelligence calculations.

This marks the first time since April 2020 that oil demand has fallen below 13 million b/d. At that time the country was just emerging from its first and most devastating wave of Covid-19 infections.

April refinery throughput contracted by 8.6% (roughly 1.2 million b/d) compared with March, and this was a key driver of the slump in overall demand.

Refiners have been dialing down their output after domestic demand started to weaken from March, leaving them with high inventories of refined products.

Energy Intelligence calculates China's apparent oil demand from the country's refinery throughput plus its net imports of 11 different refined products.

The calculation does not include changes in inventory levels because that information is not publicly available in China.

Demand Falls Across the Board

China's main refined products — gasoline, diesel, jet fuel, naphtha, fuel oil and liquefied petroleum gas — all saw apparent demand decline in April as sharply lower refinery throughput hit all production units.

The broad fall across all products also signals that the Covid-19 lockdowns hit demand from the petrochemicals sector as well as demand for transportation fuels.

China's April retail sales were down 11.1% versus the same month of last year, while the unemployment rate rose to 6.1% in April, its highest level since February 2020. That points to a significant weakening of the economy.

Worst hit was jet-kerosene — the product most sensitive to Covid-19 restrictions — as flights tumbled from around 11,000 a day in February to just over 3,000 in April, according to the International Energy Agency.

Jet-kerosene production fell to 463,000 b/d in April, its lowest level since July 2012.

Energy Intelligence calculates that apparent demand for jet tumbled to 242,000 b/d, with refiners seeking to maximize exports because of crumbling domestic demand. Jet fuel cannot be stored as long as gasoline and gasoil.

Modest Recovery Possible

May numbers could show a modest recovery in demand. Covid-19-related restrictions have eased as the daily tally of cases has fallen, and Shanghai is set to reopen on Jun. 1 after two months of lockdown.

As of May 23, Nomura Securities estimated that some 208 million people were affected by lockdown measures in areas accounting for 20.5% of China’s GDP.

That was down from 343.5 million people and 35.1% of GDP as of Apr. 25.

Beijing is also rolling out stimulus measures, and tax cuts, which could encourage auto sales and consumption of gasoil for transportation of construction materials.

But more time and a further decline in Covid-19 cases will be needed to provide a significant boost to oil demand, which Energy intelligence expects will be 800,000 b/d lower in this year's second quarter, compared with the same period of 2021.

"With most indicators in negative territory, there is no hope for Chinese demand," an analyst focused on China's energy sector told Energy Intelligence. "A recovery is unlikely if commodity prices remain at the current high levels."

Export Quotas Could Lift Runs

Government allocation of more export quotas for refined products could prompt state refiners and private giant Zhejiang PetroChemicals to raise their crude runs.

So far this year, quota allocations for gasoline, diesel and jet have been set at a meager 13 million tons for 2022, down 59% from the first half 2021, as the government seeks to limit carbon emissions from refineries.

Chinese energy consultancy JLC said last week that the government might soon issue an additional 3.5 million tons of export quotas for refined products.

That could help to draw down high inventories of products, encourage refiners to raise crude throughput, and alleviate tightness in the Asian products market.