China’s reopening to roil energy prices if Beijing overdelivers

Financial street in Beijing (Stock Image)

China’s reopening after three years of Covid Zero is the main source of optimism for commodities markets wracked by a string of bank failures and slowing global growth.

Wood Mackenzie Ltd. has run the numbers on what it could mean for prices, under a base case scenario where the economy expands at 5.5% this year, and a more bullish forecast that the government pulls out the stops to engineer growth of 7%.

Woodmac doesn’t think markets can reclaim the extreme highs of 2022 as they’ve “now adapted to the chaos brought about by Russia’s war on Ukraine.” But Beijing’s habit of over-delivering on its targets could yield significant upside to energy prices that are “leveraged to a super-charged Chinese bounce,” the research firm said in a report on Thursday.

Central to the bullish argument is the government engaging in a massive push on infrastructure investment, which raises construction growth to 10.7% in 2023 from Woodmac’s base-case estimate of 3.2%. That would ripple through into the global economy, lifting growth to 2.6% from 2.2%.

In the bullish scenario, Chinese oil demand would expand by 1.4 million barrels a day, about 400,000 barrels more than the base case. That could add $3 to $5 a barrel to its forecast of Brent averaging $89.40 a barrel in 2023, Woodmac said.

The impact on gas markets would be more pronounced as stronger Chinese demand for seaborne cargoes drives up “competition for supply at a time when no new projects are expected to be commissioned before 2025,” according to the report. As such, prices could rise to $25 per million British thermal units, versus a base case of $15 to $20 per MMBtu.

For coal, China’s high-growth scenario would boost global demand to a record level, lifting benchmark prices by 37% above the base case to $151 a ton, Woodmac said. For metals, particularly steel, aluminum and copper, rising consumption would underpin a recovery in prices, with the added twist that higher energy demand could lead to a repeat of the power-related supply disruptions seen across China and Europe over the past two years.

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