Over the past year, China’s energy demand suffered due to its zero-Covid policy. As the country’s economy begins to recover, we can expect a rebound in energy demand. According to CRU’s forecast, China’s real GDP growth is set to reach 5.2% y/y in 2023, relative to 3% y/y in 2022. However, the energy intensity of China’s economy is unlikely to increase sharply, if at all. This will limit the increase in energy demand coming from China and mitigate the risk of global oil and gas markets tightening dramatically in 2023 H2.
What does China’s economic rebound mean for crude oil demand?
If Chinese GDP grows by around the 5.2% we forecast for 2023, then Chinese oil demand can only grow by more than 5% this year if there is an increase in energy intensity (the amount of energy required to produce a unit of GDP). Given the persistent downward trend in energy intensity (Figure 1), such an increase seems unlikely. If anything, further falls are likely. China has set a target to reduce its energy intensity by 13.5% between 2020–2025, and such targets have often been surpassed in the past. Hence, the EIA's projected annual growth of 5% in Chinese demand will likely be an upper bound, unless China surprises us in terms of growth. This would translate into an extra 0.71 Mbbl/d of oil demand – a 1% increase in global consumption. Significant, but not transformational.
Despite a slight dip (down 1.3% y/y) in Chinese crude oil imports in the first two months of 2023, we believe the overall y/y trend will be positive as the demand recovery is gathering pace.
CRU expects China's economic rebound to be led by the service sector, translating into higher diesel, gasoline, and jet fuel demand. Diesel and gasoline have together made up almost half of oil product consumption (24% and 23%, respectively) since 2000 according to the EIA, and an uptick in transport fuel demand will drive crude oil demand growth in H2 2023. China's Covid lockdown policy left a much deeper dent in transport fuel demand than oil demand for industrial uses to begin with. Thus, growth in crude demand is going to be driven by growth in domestic transport fuel demand, with industrial demand taking a back seat.
How will the economic rebound affect Chinese natural gas demand and the global LNG market?
We expect Chinese LNG imports to rebound in 2023, after a 20% y/y drop in 2022 (Figure 3). The increase is going to be driven primarily by faster economic growth, as well as lower prices. As with oil, it will take time for the increase in demand to materialise. The latest statistics from the National Development and Reform Commission show that the apparent natural gas consumption was at 63.6 bcm in January-February, up 0.1% y/y.
As well as faster growth, we expect Chinese natural gas and LNG demand to be supported by coal-to-gas switching as China takes advantage of lower natural gas prices to increase its efforts to move away from a coal-intensive power generation mix. In 2022, Chinese newly operating gas-fired power plants added 8 GW of capacity, around 7% of the total Chinese gas fuelled power generation capacity. Gas-fired power plants currently under construction would increase gas-fired generation capacity by nearly one third. However, increased demand from the power generation sector will also depend on prices, as Chinese natural gas demand is more price sensitive than in Europe.
Overall, we expect Chinese gas demand to increase by around 29 bcm in 2023 (+8% y/y). However, we expect this to translate into only around 8 bcm of additional demand for LNG.
The rest will be met by higher pipeline imports and domestic production. Domestic gas production accounts for more than half of China's total natural gas consumption and is expected to grow in the coming years.
The Power of Siberia pipeline is expected to ramp up its flow to 22 bcm this year, which constitutes about two-thirds of the pipeline's eventual total capacity (Figure 4).
There are upside risks. In the case of very rapid economic growth in China, the IEA projects a 35% increase in LNG demand relative to 2022. This would amount to about 116 bcm of Chinese LNG demand in 2023. An extra 30 bcm of gas demand would likely raise global LNG prices significantly.
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