The outbreak of the Covid-19 virus again in China has led to closures and calls for citizens not to travel during the upcoming Lunar New Year holiday, raising concern that demand for oil and fuel may decline in the near term.
The Chinese government encourages citizens to stay in their cities to prevent the spread of the virus, and some provinces offer cash incentives, or “Hong Bao”, and food vouchers for people who choose to stay at home.
“China State Railways Group Co.” has lowered its estimate of the number of passengers during the holiday period to 296 million from 407 million, amid declining reservations for train tickets, the Xinhua News Agency reported. Although the estimated figure represents a significant decrease, it is still higher than the figure recorded in 2020.
And doubts about Chinese demand began to flow into the actual oil market. Some buyers are awaiting the developments of the scene, which contributes to a decline in immediate trading sentiment, according to traders, with the sale of crude oil grades from the Russian Far East and the Middle East at lower bonuses compared to benchmarks.
Hundreds of millions of Chinese usually travel during the Lunar New Year holidays, and they crowd trains and airports as they return to their hometowns for celebration.
The Chinese Ministry of Transport expects a significant decrease in the number of travelers during the 40-day holiday period from January 28 to March 8, if travelers avoid long-distance buses in favor of other options such as private cars.
China is the only major economy to grow in 2002, after the country largely contained the epidemic within its borders after strict lockdowns and comprehensive testing programs. The recent outbreak of the virus is the largest in months and began in the “Hebei” province surrounding Beijing.
Decline in demand
Jan Zhou, an analyst with Shanghai-based commodity research firm ICIS China, said that some independent refineries in Shandong Province are considering cuts in processing crude oil because the country’s re-lockdown impedes demand for fuel. Margins are likely to come under pressure because it regularly supplies fuel to the Chinese province of Hebei, as many cities have been closed due to the Corona outbreak, including the capital, Shijiazhuang.
Oil markets have recently retreated despite Saudi Arabia’s move to deepen production curbs during February and March, a timetable that overlaps with the peak maintenance of refineries in Asia. The March loading of Russian Espoo crude was traded at a premium of $ 1 to $ 1.20 a barrel, while the Dubai benchmark index fell this week, from $ 2.90 to $ 3.50 agreed last month.
The differences in Middle East grades have also been reduced, as Murban crude is traded in Abu Dhabi at a significant discount on the official selling price, and Qatari Al Shaheen crude is sold at a much lower premium. The open arbitrage window for US oil flows to Asia exacerbated the weakness.
Angolan crude sales – and Asia buys most of it regularly – were so far slower in January than in the previous month, with a quarter of February’s load cargoes still missing, according to traders.
And China’s economic recovery in 2020 led to a strong recovery in physical markets, as refiners launched bidding wars at various times to obtain cheap immediate shipments. The recovery prompted China to process record volumes of crude oil in 2020.
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