Is the recovery of the oil market in Asia running out of steam?


As Covid-19 vaccination rates in the United States and Europe reached more than half of their total populations over the summer, the governments of many of these countries have acted quickly to unlock their societies. The increase in the number of cases since the restrictions were lifted has so far failed to dampen this enthusiasm, and personal mobility has remained largely unchanged.

Compare that with Asia-Pacific. When Lawrence Wong, co-chair of Singapore’s multi-ministerial task force on Covid-19, said last week that the country had “not gone for a big bang opening,” he could just as easily have been talking about the whole region. Even for those with high levels of immunization, the spread of the Delta variant has meant that public health priorities have kept rigid restrictions firmly in place across the Asia-Pacific region. China is an obvious example: Even with a higher percentage of its population vaccinated than the United States and a number of European countries, the country has maintained its zero Covid approach with closed borders and tough local blockades in response to the lesser peak. in the case numbers.

These radically divergent strategies are having an impact not only on the outlook for the global economy, but also on the pace of recovery in oil markets. As continued mobility restrictions impact the demand for transportation fuels here in Asia-Pacific, I met with Qiaoling Chen and Yuwei Pei from our Asia-Pacific Oils Research Team to understand the implications for the region.

Prolonged restrictions continue to weigh on the pace of recovery in oil demand in Asia

While vaccines gave hope that 2021 would see us all travel again, the Delta variant left that prospect distant across Asia-Pacific. Along with the generally disappointing pace of vaccine deployment in the region, public health fears have prompted governments to keep borders closed. Combined with weaker economic growth in China, this translates into slower growth in demand for oil this year. We have now lowered our demand outlook for Asia-Pacific in the third quarter by 220,000 bpd and our forecast for the fourth quarter is now more than 300,000 bpd lower due in large part to continued restrictions on travel.

It should improve next year. We still see good prospects for global oil demand through 2022, with Asia-Pacific being a key driver as demand in the region grows by just over 2 million bpd. Much depends on the growing demand for jet fuel as travel restrictions are finally relaxed. This assumes progress on two key fronts: countries are reaching critical mass in their immunization programs by the end of next year, and governments are tentatively starting to move from zero Covid strategies to ‘living with the virus’.

With that comes obvious downside risks. Analysis from our sister company Verisk Maplecroft shows that the prospect of quarantine-free travel for vaccinated travelers to countries like China, Japan, Australia and India looks worrisome over the next 12 months at least. For those like Singapore who are phasing out zero Covid strategies, international travel will only restart with extreme caution. With a low likelihood that restrictions will be lifted anytime soon in the region, our colleague Sofia Nazalya from Verisk Maplecroft expects “Asia-Pacific to remain largely closed for next year.” Such a result inevitably has a negative impact on the demand for fuel for transport in 2022.

China: Restrictions and economic slowdown weigh on oil demand, but energy transition goals are also starting to show up in oil consumption data

Representing more than 40% of oil consumption in Asia, China is essential to recovering demand in the region. In this quarter, China’s oil demand is expected to fall 190,000 bpd from second quarter levels at 14.2 million bpd. The main drivers are more modest economic growth and rigorous efforts to stay Covid-free, which continue to expand as cases of Delta variants have increased.

But these are not the only factors shaping demand for oil in China. Energy transition policies, including tightening production limits in energy-intensive industries, targets for local governments to reduce energy consumption and targets for reducing energy intensity under the 14th five-year plan are putting pressure on unchecked economic growth, which has an impact on the demand for diesel and gasoline associated with this. The sustained pace of electric vehicle (EV) sales since the economy reopened last year has already had a modest impact on oil demand. And with the removal of subsidies for the purchase of electric vehicles in China, the government is redirecting its financial support towards charging infrastructure and encouraging automakers to increase the production capacity of electric vehicles.

India: ‘third wave’ lockdown will derail oil market recovery, but high prices bite too

Hard hit economically by its lockdown in the second quarter, India’s oil demand has yet to recover to pre-pandemic levels. We now expect Asia’s second-largest oil market to grow 300,000 b / d to 4.8 million b / d this year. Our revised forecast was shaped not only by the severe lockdown at the start of the year, but also by the lingering risks of India’s modest vaccination program to date. That said, gasoline demand is expected to exceed 2019 levels in India in the current quarter, although the potential for a third wave of restrictions as the country enters its annual festival season cannot be waived.

We also do not overlook the impact of record prices at the pump. Retail gasoline and diesel prices in India have been put into orbit by the recovery in oil prices and high government taxes on retail fuels. This has seen commercial fleet operators switch to CNG trucks to reduce costs and the demand for diesel lags behind gasoline in terms of the pace of recovery.

Mature Asia-Pacific oil markets recover, but offer limited upside potential

The recovery in oil demand is underway in the region’s mature economies. Together, Japan, South Korea, Taiwan, Australia and New Zealand are expected to see demand recover by 380,000 bpd from 2020 levels through the second half of this year. Gasoline demand in these markets – which represents a sizeable 20% of the Asia-Pacific region total – will experience modest year-over-year growth until the third quarter of 2022 before continuing to decline in the long term. .

Perhaps most interesting is Japan where, despite the recent surge in Covid infections, we are not yet seeing a major impact on gasoline demand. Indeed, the country relies mainly on public precautions instead of lockdowns or restrictions on domestic transport to contain local outbreaks of Covid-19. If others seek to do the same as economic pressures increase and vaccine deployment accelerates, demand for oil in Asia-Pacific is expected to improve in 2022.
Source: Mackenzie Wood

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