A recovery in China’s economy following its coronavirus outbreak has prompted a rebound in demand for oil, but analysts have warned that will not be enough to soak up a global glut that has resulted in a collapse in crude prices. 

Chinese petroleum consumption has plummeted this year as the pandemic, which locked down swaths of industrial supply chains and closed businesses in the country, severely hit the world’s second-biggest economy. The international spread of the virus is now expected to result in a global recession, which has piled more pressure on oil prices.

Record production cuts — set to reduce global output by about 10 per cent — agreed on Sunday in a deal that ended a stand-off between Russia and Saudi Arabia could ease a supply glut, but traders remain concerned that plummeting global demand could far outstrip curbs.

“What we saw in China was one of the steepest falls in oil demand we had ever seen,” said Per Magnus Nysveen, head of analysis at Rystad Energy, a Norway-based research company. “Now we see even higher reduction[s] in the rest of the world.”

Petroleum demand in China, the world’s largest importer of crude, appears to be rising again following the outbreak that brought the country to a near standstill for much of February, traffic and airline industry data suggest.

Data from TomTom, a location technology company, suggest that rush-hour traffic in some big Chinese cities has recently reached levels comparable to the average across 2019.

Based on analysis of Chinese use of petroleum products for cars, air travel and industry, Rystad estimated that the country’s oil consumption fell to below 10m barrels a day on average in February. It expects this to rise to about 12m barrels a day in April, but that is still below the levels of about 13.7m a day in December.

China’s airline sector, a key source of demand in the country for petroleum products, is also getting back to business after flights were grounded due to extensive travel bans and quarantine measures.

Data from aviation research firm OAG showed that there were 8m seats in the air — a common industry metric that represents passenger demand — on domestic flights in China last week, or nearly double the number at the height of the coronavirus outbreak in mid-February. However, that was still significantly below the 14.7m number of seats in the air immediately before the pandemic.

In March, China’s largest state-owned oil refineries reached about 70 per cent of capacity, after hitting a record low of 67 per cent in February, according to an S&P Global Platts survey. Smaller local refineries are even higher at more than 80 per cent utilisation, according to data provider ICIS.

But analysts say it will take more than a recovery in China’s economy to support global demand for crude. A collapse in global oil consumption following the spread of coronavirus into the US, Europe and elsewhere will “easily dwarf China’s demand recovery in the same period”, said Feng Fu, head of research for Asia-Pacific oil markets at consultant Wood Mackenzie.

Oil investors have pinned hopes on China taking advantage of low prices to top up its huge crude reserves in another move that could increase demand. Chinese officials have asked government agencies and state-owned energy companies to look into bolstering the nation’s strategic stockpile.

But analysts believe that any increase in China’s reserves could have a limited impact on global oil markets, pointing to the country’s limited storage capacity and the fact that it is already well-stocked with crude.

China does not fully reveal details of its strategic petroleum reserves, but Wood Mackenzie has estimated that including state and commercial stockpiles they could reach 1.15bn barrels in 2020, or 83 days worth of oil based on current demand levels. China had already expanded reserves from 200m barrels in 2014 to 900m in 2019.

China’s expansion of its strategic reserves, inspired by the large volumes held in countries such as the US and Japan, began in 2005 and has gone through three five-year cycles, with the latest ending in 2020.

But Li Li, head of analytics at ICIS, said there was unlikely to be large-scale expansion as Chinese policymakers did not think there was much risk of a global crude shortage. 

Beijing would be “stupid” not to stock up on reserves while prices were low, but the approval from government agencies was slow and space was limited, added Lin Boqiang, an energy specialist at Xiamen University.

“It’s not possible to get the funds together quickly, to organise transportation, to have a place to store it,” Mr Lin said. “Every country is the same. They all want to buy, but the actual volume they can buy is not very large.”

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