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China’s strict COVID19 restrictions could dampen oil demand

China’s strict COVID19 restrictions could dampen oil demand

/ News & Interviews / Friday, 15 April 2022 09:08

China's restrictions to curb the spread of the new Omicron variant is impacting logistics hubs, ports, and manufacturing units, resulting in a global supply chains disruption for goods ranging from EVs to iPhones.

Oil prices tumbled 4% earlier this week with Brent crude below $100 a barrel over concerns of reduced demand in China as well as IEA countries planning to release record volumes of oil from strategic stocks. The IEA has trimmed its overall forecast of demand growth for oil this year to just 1.9 million barrels a day, a cut of about 40% since December. In 2021, demand increased by 5.6 million barrels a day as the world recovered from the pandemic. In the meantime, Russian crude exports have declined substantially since the Russian-Ukraine war began, fuelling global oil supply concerns.

Methods such as ‘closed loop’ management that keeps workers isolated is also becoming difficult to continue as procuring materials is also becoming harder. Many companies for electronics parts have suspended production due to the restrictions.

A study by Gavekal Dragonomics found that 87 of China's 100 largest cities by GDP have imposed some form of quarantine curbs. Foreign business groups have complained that they were experiencing supply chain problems.

As such economists have cut growth forecasts for China with Beijing's official growth target of around 5.5% this year highly unachievable.

Chinese president Xi Jinping has indicated there would be no immediate change of approach in pandemic control measures.

The economic instability in China poses threat to the global economy. China is the world's largest exporter and ranks second among the world’s largest importers. Despite its strict policies, the country is fairly open to foreign trade, which represented 35% of its GDP in 2020 (World Bank, 2022). China's main exports include Electrical and electronic equipment (27%), machinery, nuclear reactors, boilers (17%), furniture, lighting signs, prefabricated buildings (4,2%), plastics (3,7%), optical, photo, technical, medical apparatus (3,1%), vehicles other than railway, tramway (2.9%), other made textile articles, sets, worn clothing (2,9%). On the other hand, the country mainly imports electrical and electronic equipment (27%), mineral fuels, oils, distillation products (13%), machinery, nuclear reactors, boilers (9,3%), iron ores slag and ash (8.8%), optical, photo, technical, medical apparatus (4,8%), vehicles other than railway, tramway (3.6%). The International Monetary Fund (IMF) is forecasting a rebound of 5.7% in the volume of exports of goods and services of this country in 2022, after an increase of 4% in 2020; and an increase of only 3.2% of its imports in 2022 after a jump of 10.9% in 2021 and 0% in 2020 (IMF Country Report, 2021).

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