Energy watchdog expects record high oil demand due to China’s COVID reopening

Global oil demand could surge to record highs this year as China lifts pandemic-era closures and reopens its economy, the International Energy Agency (IEA) said Wednesday. 

The energy watchdog forecasted that global oil demand would rise by 1.9 million barrels per day in 2023, climbing to a record 101.7 million barrels per day. Nearly half of that gain is expected to come from China, the IEA found in its January report.

“China will drive nearly half this global demand growth even as the shape and speed of its reopening remains uncertain,” the report stated, describing both China and Russia as “wild cards.”

Much of last year’s oil surplus ended up in emerging markets, as mild weather — combined with weak industrial activity — decreased demand for the resource in Europe, the IEA observed.

In fact, oil demand among Organization for Economic Co-operation and Development (OECD) countries plunged by 900,000 barrels per day in the last quarter of 2022, while demand in non-OECD nations was 500,000 barrels per day higher, according to the report.

Demand last year was also restrained by China’s coronavirus-related lockdowns, as well as winter blizzards that thwarted holiday travel in both the U.S. and Canada, the IEA found.

Meanwhile, Russian oil shipments endured an initial downturn after a European embargo on crude — as well as European Union and Group of Seven price caps — went into effect on Dec. 5, according to the report.

But these exports have partially rebounded — a situation the IEA described as “underscoring the high degree of uncertainty for the outlook.”

As 2023 progresses, the IEA cautioned that the beginning of the year’s “well-supplied oil balance” could tighten rapidly as further Western sanctions strain Russian exports.

On Feb. 5, the EU will be expanding sanctions on Russian oil to include other refined petroleum products.

Russia is one of the biggest exporters of such products worldwide, selling diesel for farm machinery, fuel oil used in home and industrial heaters, and the solvent naphtha, which can be used to boost gasoline output, according to the World Economic Forum.

“Product markets, especially diesel, are most at risk just as demand growth recovers,” the IEA report stated.

In December alone, Russia exported a record 1.2 million barrels per day of diesel, with 60 percent of that quantity heading for the EU, the agency said.

“Fresh supplies from new plants in the Middle East and from China will provide welcome relief,” the report stated.

A separate report from the Organization of the Petroleum Exporting Countries (OPEC) released Tuesday was far more cautious on China — leaving the country’s growth estimates unchanged for 2023.

While China’s relaxation of its “zero-COVID” policies could help bolster global economic growth, such steps could also “overstretch” the country’s health system, according to OPEC.

Nonetheless, the IEA report on Wednesday remained optimistic regarding China, noting that diesel from Beijing “is already arriving in Europe after Beijing raised export quotas late last year.”

In the year ahead, world oil supply is expected to slow to 1 million barrels per day following last year’s growth — led by OPEC — of 4.7 million barrels per day, the IEA report determined.

The U.S. is set to rank “as the world’s leading source of supply growth,” while other countries such as Canada, Brazil and Guyana are set to hit production records, according to the report.

Jet fuel will likely be the largest source of growth — responsible for up to 840,000 barrels per day, according to the report.

The IEA credited savings in crude consumption and use of government-owned oil stocks as having “proved their worth for managing market risks during the energy crisis triggered by Russia’s invasion of Ukraine.”

“Moving forward, accelerating efficiency gains, supporting [electric vehicle] uptake and prudent handling of government stocks will be more crucial than ever,” the report concluded.