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Oil Demand Gets Boost as China’s Harsh Curbs Bring Delta to Heel

These translations are done via Google Translate
(Bloomberg) Traffic on China’s typically busy city streets has shown signs of a recovery as the key crude-importing nation managed to quash a resurgence in Covid-19 cases, bolstering the outlook for energy demand.Congestion in Beijing, the capital, rose 11.8% as of mid-morning on Tuesday compared with a week earlier, according to real-time traffic data from Baidu. The volume in the commercial center of Shanghai was 2.8% higher, while it was up 6.8% in Zhengzhou and 3.4% in Nanjing, both regional towns.

“The recent outbreak of the delta variant has effectively been brought under control,” said Fenglei Shi, an analyst at IHS Markit. However, given a lag in fully lifting nationwide containment measures is expected, oil demand, including for jet fuel, has not yet fully recovered, Shi added.

Oil markets have been rocked over the past month as the spread of the delta coronavirus variant spurred fresh curbs on mobility in countries around the world, including in China. While that helped to drag global benchmark Brent sharply lower, evidence that activity is returning may spur a recovery. The signals from China come about a week before the Organization of Petroleum Exporting Countries and its allies meet to decide on output policy.

“China’s oil demand destruction due to lockdowns is likely smaller than many think,” Royal Bank of Canada analysts including Helima Croft said in a report.

Thanks to mass testing and strict quarantine policies, China contained the resurgence in a little over a month after the outbreak hit nearly 50 cities across 17 provinces. At one point, more than 200 neighborhoods across the country were labeled high- or medium-risk, triggering sweeping curbs that included cutting off train services and some domestic flights.

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As near-term consumption took a hit, the nation’s top refiner, China Petroleum & Chemical Corp., had to cut planned operations by 5% to 10% at some plants this month. A similar snapshot from industry researcher SCI99 showed operating rates at most state refineries declined in the two weeks to Aug. 13.

While the daily case count is now back to zero, oil traders will be on the lookout to see there’s no fresh uptick in China that could jeopardize the nation’s progress. Outbreaks of the highly infectious delta strain continue to roil other countries in the Asia-Pacific, including Australia and Vietnam.

In addition, not all activities in China have yet bounced back, however. Travel by air remains sluggish, with departures from China’s 20 biggest airports at just 40% of 2019 levels in the week through Monday, according to Sisi Tang, an analyst at BloombergNEF. That compares with about 70% in mid-July.

Goldman Sachs Group Inc., which is bullish on oil, has argued the virus wave won’t derail the rally in the commodity. “Delta is a transient event to oil demand.” analysts including Damien Courvalin wrote in an Aug 23 note.

UBG Group AG added a similar perspective, standing by its call that Brent would rebound to $75 a barrel. “We expect the oil market to stay undersupplied, and Brent to recover,” it said.

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