March 20, 2023
Qingdao China

The next major upside catalyst for oil is here |

  • Chinese stocks soared last week as Beijing considers easing or lifting its strict covid-zero restrictions.
  • China economists at Goldman Sachs believe the recent headlines simply signal the start of a months-long preparation period for reopening.
  • A premature reopening of the bull case would pose a $6 upside risk to the bank’s current $110 Brent 2023 forecasts.

Alongside the never-ending distortion of when/if the Fed will reverse (it will, it just needs to really broken markets and the economy first, when it is too late to do anything), an equally heated – and, according to some, even more important – debate surrounds China’s decision to abandon the condemned covid zero policy. There has certainly been some movement here in recent days, with Chinese stocks soaring over the past week amid rampant speculation that Beijing is considering relaxing or lifting its strict covid-zero restrictions. And while both the local government and skeptical China watchers have repeatedly tried to shoot down any unsubstantiated rumors (based on misleading screenshots) that China plans to ease its anti-coronavirus measures, a new report from Goldman’s commodities team released late Monday concludes that China is quietly, if aggressively, has increased crude imports by more than 2.5 mb/d in recent weeks as it prepares for a possible reopening, which Goldman says is still most likely to happen in the second quarter of 2023.

Here’s some more information on the Goldman report, tidied up appropriately enough”China Announces End of Lockdowns Begin”:

  • The oil market is still depleted of its most important buffers: inventories and idle capacity. At the same time, the risk of significant supply disruptions in Libya, Russia, Iraq and Iran is currently elevated. Consequently, the risk distributions around our current oil forecasts are clearly skewed higher, as spot demand continues to materialize strongly.
  • Even so, oil and broader commodities are barely above Q2 2020, driven in part by concerns over Chinese oil demand, the last major fundamental downside risk. We believe the current lock-ups will shave up to 0.9 mb/d off our January 22 expectations.
  • Our China economists believe that the recent headlines only mark the beginning of a several-month preparation period for the reopening, and thus have maintained their current base case of reopening in 2Q23 once the winter flu season is over.

Related: Oil prices will rise this winter

  • Despite this, any news of China’s reopening could drive a rally in oil, even if only to dampen uncertainty. To that end, China has already increased crude oil imports by more than 2.5 mb/d in recent weeks to prepare for this event as well as replenish depleted inventory.

Goldman is also conducting an “Effective Lockdown Index”-based exercise to contextualize what a faster reopening could mean for demand and prices.

Not surprisingly, it finds it every five percent increase in China’s ELI is about 0.2 mb/day of oil demand….

… and that an early reopening of the bull case would pose a $6 upside risk to the bank’s current $110 Brent 2023 forecasts, while a less likely full international reopening would be close to $15 a barrel.

On the other hand, maintaining the current status quo of the restrictions would instead be around $12 per barrel, which is worse than next year’s forecasts. Accordingly The bank also sees implicit growth in the oil market as the probability of reopening next year rose by 25% last week.

Finally, an additional macro risk to commodity prices this year has been the dollar, which has endured one of its steepest gains in history.

Goldman expects the USD TWI to weaken by as much as 3% as China reopens, as Asian economies benefit and broader markets experience more “risk on”. This could support oil prices at $3 per barrel.


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