OPEC Exercises Caution on China's Reopening Prospects

OPEC's forecast for global oil demand and economic growth remains largely unchanged, although the organization sounded a note of caution about China's prospects for this year. Despite hopes that the nation's reopening would herald a strong rebound in oil demand, OPEC noted that China's economy faces significant challenges.

In its closely watched monthly market report, the Organization of the Petroleum Exporting Countries (OPEC) warned Tuesday that China’s reopening could be bumpier than expected and pointed to risks, such as a flare-up in Covid-19 cases, that could delay a rebound in crude demand.

OPEC has left its forecasts for global oil-demand growth and global economic growth unchanged for the second and third months respectively. However, the Vienna-based oil producers’ group has revised its expectations for the economies of Europe and the U.S. slightly higher.

OPEC is taking a cautious approach, in contrast to many oil analysts and some investors who are betting that China’s reopening will lead to a rebound in oil demand and push prices higher this year.

China's shift away from stringent Covid-19 regulations has been quicker than many oil market analysts had anticipated, which has further bolstered hopes that Chinese demand for crude oil will rebound strongly. China's strong crude imports in December and its issuance of generous crude import quotas this month are seen as positive indicators of this growing appetite.

OPEC has not reflected the growing optimism for China's economy and oil demand in its forecasts, despite expecting a rebound next year.

The IMF expects China's economy to grow by 4.8% this year, compared with growth of 3.1% in 2022. These forecasts have remained unchanged since October, despite protests in China in November that presaged Beijing's sudden shift in policy. Globally, the IMF expects economic growth to slow to 2.5% this year from 3% in 2022. These levels have also remained largely unchanged since October.

The cartel's oil-demand forecasts have remained largely static in recent months, with a slowdown in growth expected this year. The cartel expects global oil-demand growth to slow to 2.2 million barrels a day in 2021, from 2.5 million barrels a day in 2022. It expects global oil-demand to average 101.8 million barrels a day this year, compared with 99.6 million barrels a day in 2022.

OPEC's report pointed to risks associated with China's reopening. The reopening has been accompanied by a sharp rise in cases, which could yet impact oil demand or force Chinese policy makers to change course again.

OPEC said in its report that it remains to be seen what the scale of the rebound in China's economy will be, as there is still a possibility that new social-distancing measures could be implemented in the coming weeks if the burden on the health system becomes too large.

Oil analysts have been more optimistic about demand, surprised by the pace and resolve of China’s recent steps. This is in contrast to other analysts who have been more pessimistic about the future of oil demand.

"The end of China's zero-Covid policy is coming sooner than we and many others had expected," said Caroline Bain, chief commodities economist at Capital Economics. "It now appears that the worst is behind us and that a renewed focus on pro-growth policies will spur Chinese economic growth sooner than expected."

Oil prices have been on the rise in recent weeks, with both Brent crude and WTI (the main U.S. oil benchmark) seeing significant increases. Brent crude rose 1.7% on Tuesday to $85.86 a barrel, while WTI rose 0.8% to $80.49 a barrel. These prices are up from lows of $76.10 and $70.10 a barrel, respectively, in December.

OPEC has said that while the outlook for China remains uncertain, nations in Europe and the U.S. should see stronger-than-expected economic growth this year thanks to efforts to bring inflation under control.

OPEC has raised its forecasts for U.S. and eurozone economic growth this year. For the U.S., the organization now predicts growth of 1%, up from last month’s estimate of 0.8%. For the eurozone, OPEC has raised its forecast to 0.4% from 0.3%.