Oil Eyes Downside As China Reiterates Strict COVID Clearance Policy

Key Highlights

• Hope emerged of looser Chinese handling of COVID outbreaks after CCDC guidance.
• Hopes were dashed after CCDC refers back to the previous near-‘zero COVID’ strategy.
• IEA warns of the dangers of still too-high oil prices, despite recent falls.

Following notable lockdowns in Shenyang, and Shanghai, and reports that the authorities in other cities, including Ningbo and Beijing, have begun implementing limited restrictions to curb the spread of the virus, there had been hopes in recent days of a softening in China’s strict policies for handling COVID outbreaks.

These hopes arose from the publication earlier this week by the Chinese Center for Disease Control and Prevention (CCDC) of a guide that outlined measures for quarantining at home. This would alleviate the economy-paralyzing effects of people having to quarantine at centralised state-run facilities, even if suffering from very mild symptoms or none at all but having tested positive for COVID.

The feed-through effects on oil demand from these economy-crimping policies remain profound. China remains the largest annual gross crude oil importer in the world, having surpassed the US in this regard in 2017, and has effectively the world’s backstop bid for oil since the early 1990s.

CCDC Backtracks On ‘Softer’ Policy Guidance

These hopes, however, appear to be dashed as, when asked for further clarification of these home-quarantining procedures, the CCDC simply reiterated the previous rules.

A modicum of flexibility in China’s ‘zero-COVID’ strategy has been introduced in light of the latest COVID outbreaks – to allow for daily increases in symptomatic cases to be capped at around 200 on a national basis. However, this adjustment is of little practical use, given that it is currently seeing the largest wave of COVID infections since the Wuhan outbreaks in early 2020.

Bearish ‘China COVID’ Effect On Oil Now Cited By IEA And OPEC

The ‘China COVID’ bearish effect on oil prices was not only cited by OPEC in a report earlier this week but also subsequently by the International Energy Agency (IEA). Specifically, the Agency lowered its 2022 global oil demand outlook by 260,000 barrels per day (bpd) and sees demand growth of just 1.9 million bpd due to the China COVID lockdowns plus broader weakness across OECD countries.

‘Oil Prices Remain Troubling High’

The Agency also warned that even though crude oil prices have come back down recently they still: “Remain troublingly high and are a serious threat to the global economic outlook.”