LONDON (Bloomberg) - As Covid-19 lockdowns gripped the world in 2020, Bernard Looney, chief executive officer of BP Plc, made a startling admission: He thought that oil demand might never return to its pre-pandemic peak. But recently, Looney has done an about-face.
After announcing ambitious plans to cut emissions, BP, one of the world’s top crude producers, is now plowing more money into fossil fuels. Oil consumption is heading for a record this year, according to the International Energy Agency, which advises major economies. Supply — buffeted by Russia, Ukraine war, a slowdown in U.S. shale growth and lackluster investment in production — can’t keep up.
It all comes down to China: The world’s second-biggest oil consumer is snapping up crude after reversing its strict Covid-19 policies. Against a backdrop of tight supply, the demand boost has everyone from Goldman Sachs Group Inc. to trading powerhouse Vitol Group predicting a rally to $100 a barrel later this year.
“The demand from China is very strong,” Amin Nasser, CEO of Saudi Aramco — the world’s biggest oil company — said in a March 1 interview in Riyadh.
By the second half of the year, analysts say, the market will face a shortage — a scenario that will loom over the industry leaders meeting this week in Houston for CERAWeek by S&P Global, a major annual energy conference.
The impending crunch shows that even as the world embraces cleaner sources of energy, the thirst for oil is hard to slake. While the supply pinch has been a boon for crude producers and their investors, it’s hammering consumers and complicating central banks’ efforts to tame inflation.
In the wake of its abrupt reversal of Covid Zero — the policy requiring mass lockdowns, travel quarantines and testing and tracing — China’s economy is resurgent, boosting oil demand. Manufacturing posted its biggest improvement in more than a decade last month, services activity is climbing and the housing market is stabilizing.
The reopening means Chinese oil consumption is poised to hit a record this year. Daily demand will reach an all-time high of 16 million barrels a day after contracting in 2022, according to the median estimate of 11 China-focused consultants surveyed by Bloomberg News earlier this year.
It’s not just China. India and other countries across the Asia-Pacific region are consuming more oil as borders reopen, helping propel global demand to a record 101.9 million barrels a day this year and potentially plunging the market into a deficit by the second half, according to the IEA. Air traffic is recovering, boosting jet-fuel use. And the appetite for crude in the U.S. and Europe has also rebounded.
The revival of international travel with China’s reemergence will be one of the “engines that will drive demand going forward,” Christopher Bake, a member of Vitol’s executive committee, said at the International Energy Week conference. “I think we’ll see that progress over the next few months.”
Supply is no match for the uptick in demand. Though Russia’s oil exports by sea remained resilient last month, market watchers are looking for signs of disruption after the European Union and the majority of Group of Seven nations banned waterborne imports of oil and fuel following the invasion of Ukraine. Russia’s shipments are under threat as India, a top buyer, faces mounting pressure from bankers to show that its cargoes comply with the $60-a-barrel price cap imposed by the G7.