China’s oil market is making a comeback after a torrid year, driven by rising consumption at home and abroad that could help lift global prices and deliver a big payoff for its embattled refining sector. 

The stars are aligning after the government’s abrupt end to growth-sapping Covid Zero restrictions was followed by a burst of travel during the Lunar New Year break. At the same time, the war in Ukraine is lifting overseas demand for oil products, with Chinese firms poised to benefit from Beijing’s generosity with export quotas.

A rapid economic recovery as the world’s biggest crude importer finally puts the virus behind it will have a pronounced impact on prices. The most bullish Wall Street forecasts call for Brent futures to top $100 a barrel for the first time in nearly half a year as Beijing reopens for business.

“China’s reopening certainly seems to be bolstering demand for crude,” said Michal Meidan, a director at the Oxford Institute for Energy Studies in the UK. “Both domestic and export margins are looking strong.”

It’s a big shift from 2022, when demand at home cratered and imports fell because of travel curbs and citywide lockdowns. That hit the refining units of state titans like Sinopec and PetroChina Co., which turn crude into products like diesel and jet fuel, undercutting profits that had climbed to record levels after Russia’s invasion caused oil prices to spike.

China’s oil majors are now set for a bumper year as profits swell from both drilling and processing. They could be good bets for equity investors, not least because the companies have typically traded at a big discount to their US and European peers, said Neil Beveridge, senior oil analyst at Sanford C. Bernstein.

There are potential spoilers. Chinese demand may yet fall short of expectations, which could hit prices hard given how much has been staked on the economy’s recovery. More broadly, any boost to oil prices from China’s reopening risks stoking global inflation just as central banks are starting to get it under control, which could spark another round of volatility in financial markets. 

Juicy Returns

Still, companies are ramping up operations in anticipation of juicy returns. Output at China’s larger refineries should return to peak levels in the first quarter, company executives told Bloomberg. Over the whole year, oil processing will rise to a record 14.4 million barrels a day, the International Energy Agency predicted last month. That compares with 13.6 million barrels over 2022. Energy Aspects Ltd. forecasts daily refining volumes in the first half to climb as high as 14.5 million barrels.

At the end of last month, margins had returned to where they were before the Shanghai lockdown in the spring crushed demand, OilChem said. That’s coincided with another big increase in export quotas to 19 million tons, 46% higher than the same period last year, industry consultant JLC reported.

The rebound in activity is being driven by both domestic and overseas factors, the company executives said, declining to be named because they aren’t authorized to speak publicly. Easier travel around the country will mean more demand for fuels, while international sanctions on Russian products as punishment for its invasion are also creating an opening on world markets that Chinese refiners are keen to exploit. 

China began raising quotas in the fall, ostensibly to compensate for the slowdown in the domestic market as Covid Zero curtailed travel. Beijing’s export drive now looks particularly well timed after the sanctions on Russian oil were extended to products on Feb. 5. As a result, China’s shipments of gasoline, diesel and jet fuel could hit 4.2 million tons this month, almost 7% higher than January, OilChem estimated. 

The optimism is feeding back into China’s appetite for oil imports, which declined last year for only the second time since 2005. China’s biggest oil trader Unipec, a unit of Sinopec, made a flurry of purchases of Abu Dhabi crude last month that could indicate brighter prospects for downstream demand. Saudi Arabia has also raised prices for cargoes to Asia, signaling that it, too, expects more buying interest from its biggest customer. 

Much depends on how quickly China returns to pre-virus normality, but the robust rebound in travel over the Lunar New Year has boosted confidence in the outlook. Domestic flights, for one, soared 80% over the period after the decision to scrap almost three years of stringent lockdowns unleashed pent-up demand. Traffic congestion in major cities has tripled since the end of the holiday, according to BloombergNEF.

And Beijing’s role in lifting consumption may still have room to run. Investors will be watching the government’s budget in March for additional stimulus to revive growth.

After an initial bump as people enjoy their newfound freedom, the recovery in Chinese oil demand is likely to be gradual, Vandana Hari, founder of Vanda Insights in Singapore, told Bloomberg TV on Tuesday.

“In terms of China actually getting into the groove and into its regular economic activity and acceleration, I think that will probably happen more gradually through the second half of this year and definitely going into next year,” she said.