Wednesday, January 18, 2023

OPEC Remains Cautious on China Despite Reopening Hopes


(WSJ) OPEC left its forecast for global oil demand and global economic growth largely unchanged, and sounded a cautious note about China despite hopes that the nation’s reopening this year would herald a strong rebound in oil demand.

The Organization of the Petroleum Exporting Countries, in its closely watched monthly market report, warned Tuesday that China’s reopening could be bumpier than expected and pointed to risks, such as a flare-up in Covid-19 cases, that could delay a rebound in crude demand.

The Vienna-based oil producers’ group kept its forecasts for global oil-demand growth steady for the second month in a row. Its forecasts for global economic growth this year were also left unchanged for a third month, though OPEC revised slightly higher its expectations for the economies of Europe and the U.S. 

OPEC’s cautious outlook stands in contrast to that of many oil analysts and some investors, who are betting that China’s reopening will be a key factor that could see oil-demand rebound and push oil prices higher this year after several months in the doldrums. 

China’s pivot away from strictly enforced Covid regulations has been faster than many oil-market watchers had been expecting, which has only served to add to hopes that Chinese demand for crude will come roaring back. China’s strong crude imports in December and its issuing of generous crude-import quotas this month have been taken as positive signs of that growing appetite.

While OPEC still expects China’s economy to rebound next year and its appetite for oil to be strong, it has refrained from reflecting that growing optimism in its forecasts. 

It expects China’s economy to grow by 4.8% this year compared with growth of 3.1% in 2022, forecasts which have remained unchanged since October despite protests in China in November that presaged Beijing’s sudden shift in policy. Globally, it expects economic growth to slow to 2.5% this year from 3% in 2022, levels which have also remained largely unchanged since October. 

Its oil-demand forecasts have also remained largely static in recent months. The cartel expects global oil-demand growth will slow this year to 2.2 million barrels a day, from 2.5 million barrels a day in 2022. It expects global oil-demand to average 101.8 million barrels a day this year, compared with 99.6 million barrels a day in 2022.

In its report, OPEC pointed to risks surrounding China’s reopening. The reopening has been accompanied by a sharp rise in cases which could yet crimp oil demand or force Chinese policy makers to change course again, it said.

“With rising Covid-19 infection rates, it remains to be seen what the scale of the rebound [in China’s economy] will be as there is still a possibility that new social-distancing measures could be implemented in the coming weeks if the burden on the health system becomes too large,” OPEC said in its report.

In contrast, oil analysts have been more optimistic about demand, surprised by the pace and resolve of China’s recent steps. 

“The dismantling of China’s zero-Covid policy has come quicker than we and many had expected,” said Caroline Bain, chief commodities economist at Capital Economics. “It now appears the worst is behind us and that the end of zero-COVID and a renewed focus on pro-growth policies will spur Chinese economic growth sooner than expected.”

Oil prices have also risen in recent weeks. Brent crude, the international oil benchmark, rose 1.7% Tuesday to $85.92 a barrel, from a low of $76.10 a barrel in December. WTI, the main U.S. oil benchmark, has followed a similar course. On Tuesday, it edged up 0.4% to $80.18 a barrel. 

While the outlook for China remains uncertain, OPEC said nations in Europe and the U.S. should see stronger-than-expected economic growth this year thanks to efforts to bring inflation under control.

OPEC raised its forecasts for U.S. economic growth this year to 1% from last month’s estimate of 0.8%. For the eurozone, OPEC raised its forecast to 0.4% from 0.3%.

Source: Wall Street Journal by Will Horner  Updated Jan. 17, 2023 3:20 pm ET

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