Demand jitters were thrust back into the spotlight yesterday amid a sharp rise in global coronavirus cases. Nowhere is this more obvious than in India. The world’s third-biggest oil importer and one of the largest growth drivers of demand in recent years is reeling from a deadly second Covid wave. On Tuesday, the health ministry reported 259,170 new infections, a sixth day over 200,000. More than 2,000 deaths were reported. Large swathes of the country announced fresh restrictions, including the capital New Delhi which began a six-day lockdown. Indian PM Narendra Modi stopped short of imposing a national lockdown yesterday, though his hand might soon be forced if the situation deteriorates further. And it’s not just India. Parts of Japan are seeking a return to a state of emergency as cases skyrocket.

The Covid effect made for a down day across the energy complex. Brent ended the session 48/cts lower at $66.57/bbl while WTI settled 76 cts/bbl in the red at $62.67/bbl. That said, both markers started the day in bullish fashion. This came on the back of a supportive cocktail of dollar weakness and the spectre of supply disruptions. After a relatively long period of stability, Libya is facing the prospect of a drop in production over the coming days after its NOC declared a force majeure on the Hariga port. Yet this was ultimately overshadowed by the worsening Covid situation in certain parts of the world. As if for good measure, reports that Iranian nuclear talks in Vienna were moving forward added to the late sell-off.  The oil market has seen its fair share of up and downs recently, and until vaccinations reach a large enough share of the global population, this will continue.

Sentiment, by in large, remains cautious at the time of writing as attention shifts to the state of US oil inventories. Overnight, the API reported that crude stocks rose by 436,000 bbls last week. Gasoline inventories fell by 1.6 million bbls while distillate fuels stockpiles jumped by 655,000 bbls.

China hits the brakes

Recent data out of China chimed with the increasingly optimistic outlook for oil demand. Chinese refineries processed 20% more crude in March compared to the same month last year. The increased refinery throughput was made possible by a strong rise in crude oil imports. China imported 11.69 mbpd of crude oil last month, up by 21% on the year, according to official customs data. Granted, this recovery comes from a low base. Chinese oil demand in March 2020 was hit by a nationwide Covid-19 lockdown. Nevertheless, it points to a further recovery by the most important mover and shaker on the oil demand front.

Or does it? Despite the substantial annual increase in crude imports and throughputs, the March average was lower than the February average. This potentially suggests a pending reversal of the trend. Indeed, many market players expect a further slowdown in oil imports and refinery demand as Chinese refiners enter into the planned spring maintenance this month. In addition to the seasonal factor, higher oil prices will also likely discourage a rebound in oil buying by Chinese refiners. The crude oil that China imported in March was purchased in December and January, when oil prices were somewhere in the $50s. With Brent crude now flirting with the $70 mark, buying appetite is likely to slow down in the second quarter.

All the while, acting as another drag on forthcoming crude purchasing from the world’s top oil importer are bulging stockpiles. Earlier this year, Bloomberg reported that China’s crude oil reserves reached a level equal to 100 days of imports, which is near the country’s storage capacity limits. And this level has likely increased further since then. This is because China’s rate of stockpiling is widely thought to have ticked higher in March following a record influx of Iranian crude.

The issue of massive refining overcapacity is also set to dampen near-term Chinese buying interest. S&P Platts reported earlier this month that Beijing is taking steps to curb this overcapacity. So far, these involved a series of inspections at more than 50 private refineries that begun last week. This clampdown could result in refinery closures, which would, in turn, affect imports negatively. For now, the recently launched investigation of China’s private refining sector will likely put brakes on independent refiners’ crude purchases, at least temporarily.

A less publicised headwind concerning China’s appetite for foreign crude – rising domestic production – is also gaining prominence. Chinese oil production in March rose both compared to the average of the previous two months and to the same month of 2020. Domestic crude output in March at 4.02 mbpd, up 3.3% from the same month last year, and also above the 3.89 mbpd in the first two months of 2021. In its latest five-year plan, Beijing emphasises increased domestic production with reduced dependence on imports. Clearly, energy security remains a top priority for China. In a further sign of its intent, China’s biggest oil company, PetroChina, recently revealed plans to be the world’s top-spending driller this year.

All things considered, a host of factors will likely lead to slower Chinese imports for both May and June and perhaps beyond. Needless to say, a decline in Chinese imports would pressure prices, especially because it would coincide with OPEC+’s production increases that aim to return some 2 mbpd to global markets by July. The market is currently preoccupied with when oil will hit $70. In truth, it should be concerned over the potential fallout from the impending lull in China’s crude import growth.