Lower oil prices on the horizon as China enters next phase of Covid crisis

Since the late 1990s, China has been the big beast in global oil markets, driving demand for the oil and other commodities it used to fuel double-digit economic growth every year for many years. then high single-digit growth for years. . As recently as 2017, China’s high economic growth rate still allowed it to overtake the United States as largest annual crude importer of crude oil in the world, having become the largest net importer of petroleum and other liquid fuels in the world in 2013. From 1992 to 1998, China’s annual economic growth rate was essentially between 10 and 15 percent; from 1998 to 2004 between 8 and 10%; from 2004 to 2010 between 10 and 15% again; from 2010 to 2016 between 6 and 10%, and from 2016 to 2022 between 5 and 7%. From this point on no one knows precisely where it will go except that it is likely to go lower, and the main reason it will go lower is the country’s handling of Covid – specifically its ‘zero-Covid’ policy. “. However, every choice for China about the direction it takes in terms of policy – whether to stick to it or to relax it further – carries enormous risks for the country and for its leader, Xi Jinping, with whom the policy is personally associated. . Whatever Xi chooses, however, it is almost certain to result in a long period of lower oil prices. This, while unwelcome for oil companies and net oil producing countries, will be extremely welcome for several major developed economies and their citizens who have seen high oil prices over the past few months play a key role in destroying their savings, their pensions and their quality of life. Related: US Oil and Gas Drilling Activity Is Going Nowhere

To briefly recap, China’s zero-Covid policy is based on ultra-tight lockdowns that are introduced in entire areas, including major cities, immediately after a relatively small number of Covid-19 cases have been reported. identified. December 2021 saw a refinement of the zero-Covid strategy into one incorporating the idea of ​​“dynamic compensation”, which gave local governments more flexibility to impose restrictions, allowing daily increases in symptomatic cases to be capped at around 200 on a national basis. On November 11, the Chinese government unveiled 20 minor edits zero-Covid policy, including travelers from overseas requiring only one negative PCR test within 48 hours of boarding a flight to China instead of two. Another was that foreign travelers would only have to quarantine for eight days, instead of 10, and another was that in China people considered ‘close contacts of close contacts’ of Covid carriers -19 would no longer need to quarantine. The new guidelines also prohibited mass testing unless “it is not known how infections are spreading” in an area.

Despite this slight relaxation of the rules, Chinese President Xi now faces a wave of public protests against the still tight restrictions linked to Covid-19 across the country of an unprecedented severity since those of the mid-1980s which culminated in the 1989 massacre in Tiananmen Square. The latest round of such protests began after at least 10 people were burned to death in an apartment fire in the city of Urumqi, the capital of eastern Xinjiang province, with many blaming lockdown rules for Covid to delay any emergency services response. According to several live TV reports at the time, the protests spread to several major cities, including Shanghai and Beijing, with protesters shouting “Resign, Xi Jinping!” Quit, Communist Party! “. It would seem that in the same way that the protests of the 1980s were largely motivated by the breakdown of the understanding between the people and their government – that the former were content to accompany the controlled regime of the latter provided that prosperity given to them – so are the current protests. For prosperity, however, economic growth is necessary, and the more of it the better for the government, and that is where its problem lies right now.

President Xi is caught between the metaphorical rock and the anvil. On the one hand, if he sticks to near-zero Covid restrictions — at this point, virtually no meaningful restrictions — then China’s economic growth will continue to deteriorate. Moreover, the scale and scope of protests against him and his regime are likely to increase. On the other hand, however, if he significantly relaxes China’s Covid-19 control measures, it is highly likely that large numbers of Chinese people will die, resulting in the exact same dreadful scenario to which China would face if it stuck to strict control policies. for Covid-19.

The reason why a large number of deaths would result from any significant lifting of controls related to Covid-19 is that China still does not have an effective vaccine against the disease or any variant of it, despite offers from all major vaccine-producing countries to manufacture such a vaccine. supplies he has. China also lacks an effective post-infection antiviral, and it still refuses to purchase such supplies from foreign suppliers, again despite offers from several Western countries to make such antivirals and treatments available. post infection. Due to China’s initial response to the Covid-19 outbreak in 2019 – draconian lockdowns across the board – the country still has large numbers of its people without any vaccinations against any variant of the disease, even its own Chinese vaccine (CoronaVac) and it has a critical shortage of Intensive Care Units (ICU).

“There are 263 million people in China who are over 60 and 35 million people over 80 and the susceptibility of the elderly to severe cases of Covid-19 is well known,” said Rory Green, economist in chief for China at TS Lombard, in London, told exclusively OilPrice.com Last week. “Of those over 80, only 66% are vaccinated and only 40% have had three injections, and we know from detailed medical analysis of the Hong Kong outbreak that the CoronaVac injection did not help. equivalent efficacy of mRNA vaccines only after three doses, so that leaves about 37 million people over the age of 60 vulnerable to a generalized epidemic of Covid,” he says. After vaccinations, the main consideration in managing Covid-19 outbreaks is the treatment of those who have been severely affected by the disease, and that means intensive care capacity in hospitals, but China also has a major problem. here. “Various studies put the number of intensive care units per 100,000 people at between 3 and 6 in China, compared to 2.3 in India and 34.7 in the United States,” Green told OilPrice.com. “What the national-level analysis misses is regional variation in critical care coverage: the majority of critical care in China is in the wealthier eastern provinces, which tend to have lower vaccination rates. higher and better demographics, and local estimates taking into account city-level demographics and health. postulate that the most vulnerable city – Lijiang in Yunnan province – would need a 6000% increase in intensive care capacity to adequately deal with an outbreak of Omicron,” he points out.

So how bad could things get for China? Data from the February 2022 outbreak in Hong Kong will likely offer the most relevant comparison, Green thinks. “Return to China CDC [Center for Disease Control] micro-estimates of city-level health care delivery, if we use the February 2022 outbreak in Hong Kong as a benchmark for community spread and case severity, it is estimated that only 7.3% of the Chinese population lives in cities with sufficient ICU capacity, with the remaining 92.7% living in areas where ICU resources would be completely overwhelmed by the epidemic,” he says. “The shock to a relatively unvaccinated population could be substantial: based on Hong Kong’s death rate, China could experience 50,000 deaths a day at the height of an uncontrolled outbreak,” he said. In economic terms, therefore: “In short, China remains well and truly locked in and we believe that real GDP, as measured by TS Lombard, will reach 1.6% year-on-year this year”, concludes Green.

Removing much of the economic power behind China’s big supply in global oil markets would mean a much weaker real demand backdrop for oil prices going forward, especially with any concomitant declines in the Russian-Ukrainian war bounty. This premium started last September when sophisticated market players started buying oil on the basis of observations of US intelligence officers highly unusual Russian military movements on the Ukrainian border after the conclusion of the joint Russian-Belarusian military exercises that had taken place. Before that, oil regularly traded around US$65 per barrel of Brent. This level reflected the equilibrium price which took into account the already weaker demand from China. As this Russian-Ukrainian war premium declines as Europe continues to replace energy from Russia with energy from other sources, as it will, this level of US$65 a barrel will likely be the basis point of oil prices from then on.

By Simon Watkins for Oilprice.com

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