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Asia witnessed a low demand for petroleum and gasoline doing the first half of 2022 – thanks to lockdowns in some regions in China and soaring inflation across the continent. However, the oil market narrative for the next six months may be different. Experts are of the view that the second half of 2022 may see the strongest oil demand in three years.
The year began with hopes of post-pandemic recovery, but the war in Ukraine changed everything. Rising oil prices resulted in high inflation. The situation worsened with the U.S. embargo on Russian oil and EU sanction on the shipment of Russian oil.
In China, the strict Covid-19 measures and subsequent lockdowns in major cities and manufacturing hubs led to a sharp decline in demand for oil. Rather, oil production in China plunged by a half million barrels per day in the first half of 2022. Experts, however, expect China to rebound in the second half of the year but say that it would not be enough for the country to make up for the loss in the first half of the year.
Demand for oil declined by half a million barrels in China in the first half of 2022 and the market expects that it will increase by half a million barrels in the second half. In addition, Southeast Asia will see a rise in demand for jet fuel and China will add to the supplies.
India continues its growth and is expected to grow further, albeit marginally. Though the Southeast Asian nations are relatively smaller economies compared to China and India, they are open after the pandemic and on the path to post-pandemic recovery. With the borders opening up, especially to boost tourism, the region is likely to witness a rise in demand and supply of crude oil and gasoline despite high prices.
Meanwhile, oil prices slipped on Tuesday, continuing losses from the earlier session, as investors were anxious about global oil demand owing to weak manufacturing data in many countries. The drop came after Brent futures plunged on Monday to $99.09 a barrel – the lowest since July 15. The U.S. crude benchmark also plummeted to $92.42 a barrel – the weakest since July 14.
Oil prices have been unstable, as investors fear tight global trade with fears of an impending global recession. The slide in oil prices comes ahead of a meeting between the OPEC and allies, including Russia, together known as OPEC+, on Wednesday to decide on September output.
Refining activities to ramp up
Going by the trend, oil refining activities are likely to ease in Asia in the second half of the year. High demand for oil and gasoline, especially jet fuel, in the region will result in ramping up production and margins will remain supportive. GlobalData, a data and analytics firm, expects China to lead the refinery crude distillation unit (CDU) capacity additions in Asia with 3.4 million barrels per day, contributing about half of the region’s total CDU capacity additions between 2022 and 2026. Of this, 2.8 million barrels per day will be from build projects, while the remaining is from the expansion projects undertaken by the country. The data and analytics company adds that India is expected to contribute about 15% of the continent’s crude oil refining capacity in 2023.
However, much of this will also depend on the hurricane season. According to the weather forecast, several hurricanes are expected this September and more hurricanes would mean major disruptions in the oil market. As a result, the prices will remain higher.
Asia: Toll on oil demand
Notwithstanding the positive outlook of increased oil supply in the second half of 2022, GlobalData believes that soaring inflation, which is expected to rise to 7.5% by the end of 2022 across Asia, will influence the oil market. As the world is confronted with high fuel and food prices, they are likely to take a toll on oil demand in Asia. A recent Crisil report says that CPI inflation is expected to reach 6.8% in FY23 on account of high food prices
Currently, oil supplies are well below the 2019 levels and the fear of an impending recession in some regions may hit oil demand again. On the brighter side, there will be an increase in five billion barrels of oil this year. While half of this will come from the OPEC countries, 1 million barrels is expected from the non-OPEC nations. As the supplies will be less tight, oil prices may drop to below $100 per barrel in the fourth quarter.
Experts are of the view that the price of crude oil may drop to $90 per barrel in 2023 as Asia is gradually opening again after the pandemic. Moreover, China and India have regulatory fuel policies and fuel prices like an oil price cap, and these would help in cooling the oil markets in Asia.
Supply losses likely to expand
As the war in Ukraine shows no sign of ending, losses from the Russian oil supply are likely to expand. This is mainly due to the sanctions imposed by the UK and the EU, and partially because implementation of the oil price regulation policies in China and India.
While Russian oil is still flowing in some Asian markets, several countries have altered their procurement sources. However, much will depend on what will happen when the demand for oil increases in China how Asian countries are changing their procurement sources and how the European refiners deal with sanctions kicking in. All these will influence the Asian oil market.
