Oil’s inflation-inducing rally could get supercharged with demand rebound

OIL’S inflation-inducing rally could get supercharged with China’s biggest driller betting on a demand rebound if lockdowns ease as the US summer driving season starts.

Consumption in China, the world’s biggest crude importer, could jump 12 per cent in the third quarter compared with the second, according to China National Petroleum Corp. That comes at a time when the world’s largest consumer, the US, hits its peak demand season and as Opec+ struggles to raise output with many buyers shunning Russian supplies.

China is tentatively easing Covid restrictions in key cities, including a crippling two-month lockdown in Shanghai. Along with promised government stimulus, that will boost demand by 1.6 million barrels a day on a quarterly basis from July to September, said Dai Jiaquan, a director at the oil research department at CNPC. On an annual basis, demand in the third quarter is expected to be up 5 per cent, Dai said on a webcast this week. 

To be sure, Dai said the road to recovery will be bumpy, with parts of Shanghai and Beijing already back in lockdown just days after restrictions were eased. His comments came before Shanghai announced temporary restrictions in seven districts this weekend for mass testing. This year’s growth may also be flattered by a low basis in the second half of 2021, when virus flareups were already crimping demand.  

Banks are also divided on the speed of the rebound, with China International Capital analysts expecting it “will be quick” while Bank of China International forecasts modest recovery in the third quarter followed by a stronger rebound in the fourth, Xiao Fu, head of commodity markets strategy, said this week.

While consumption in China is recovering, Goldman Sachs Group analysts said the bank remains cautious on its demand expectations and predicts that rolling lockdowns will be a headwind to mobility this year. Still, the rebound from peak demand-destruction levels, along with a further drop in Russian output, led the bank to raise its Brent price forecast this week by US10 a barrel for the latter half of 2022 and the first half of 2023. BLOOMBERG