Will OPEC+ Abandon Its Output Cuts Amid Soaring Chinese Demand?

A strong rebound in China’s oil demand this year may lead to the OPEC+ group reconsidering its production targets and quotas, according to the International Energy Agency (IEA). 

China’s reopening is putting upward pressure on global oil demand, and half of this year’s demand growth is set to come from the Chinese growth in consumption, the IEA says.  

In case of a strong rebound in Chinese demand, OPEC+ may have to reconsider their output policy, the IEA’s Executive Director Fatih Birol told Reuters this weekend.  

“If demand goes up very strongly, if the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their (output) policies,” Birol told Reuters on the sidelines of an energy conference in India.  

The million-dollar question is whether the OPEC+ group, which includes non-OPEC producer Russia, will respond to rising demand by lifting oil production targets, or prefer to see how the embargoes and price caps on Russian crude and oil products would alter market flows and supply, and how interest rate hikes will impact economies in the short term. 

Last year, while the world saw overall oil demand grow following the reopening of economies and gas trade flows materially shifted after the Russian invasion of Ukraine, China’s demand was subdued and fell for both fossil fuels—for the first time in decades. The Chinese economy continued to grow last year, but at a much smaller pace than in previous years. 

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This year, the reopening is expected to drive a rebound in oil demand, which could be pressured further upwards by “exploding” jet fuel demand in China, according to the IEA’s Birol.   

The agency said in its Oil Market Report for January that global oil demand was set to rise by 1.9 million barrels per day (bpd) in 2023, to a record 101.7 million bpd, with nearly half the gain coming from China following the lifting of its Covid restrictions. 

“China will drive nearly half this global demand growth even as the shape and speed of its reopening remains uncertain,” the agency noted.

However, the IEA also said that “Two wild cards dominate the 2023 oil market outlook: Russia and China.”

The EU ban on Russian oil products – in place from February 5 – could soon mean that “the well-supplied oil balance at the start of 2023 could quickly tighten however as western sanctions impact Russian exports,” the IEA said in its January report. 

Russia’s energy revenues are trending down due to the sanctions, which have led to a slump in the price of Russia’s flagship crude grade, Urals. Russia’s budget revenues from oil and gas – including taxes and customs revenues – plunged in January by 46% to the lowest level since August 2020, according to data from its finance ministry.  

Russia’s oil revenues alone are estimated to have dropped by 30% – or by around $8 billion – year-on-year in January, the IEA’s Birol told Reuters, adding that the price cap has worked in both keeping the market supplied with Russian oil and reducing Putin’s revenues. 

Last week, OPEC+ kept its production targets unchanged in a widely expected ‘wait-and-see’ approach to supply just ahead of the EU ban on Russian diesel and other petroleum products. 

Supply from Russia, demand in China, the state of the economies in the coming months, and the trend in interest rate hikes in the U.S. and other major mature economies will be the key decision drivers for OPEC+ this year. As will be the price of oil on the markets—the group led by Saudi Arabia and Russia is unlikely to leave oil trading below $80 per barrel.