On and Off Lockdowns in China Cause a Significant Drop in its Refining Output

After China's main economic hub imposed further lockdown restrictions on June 9, Shanghai and Beijing were placed on a new COVID-19 alert. The worst annual fall in Chinese refinery production in at least a decade occurred in May due to strict lockdowns in Shanghai and resulting decreased fuel consumption.

Despite the fact that China's infection rate is low by global standards, President Xi Jinping has reaffirmed China's zero-COVID policy, which officials claim is necessary to protect the elderly and the country's medical system, even as other countries try to live with the coronavirus. The Chinese economy has been battered, supply lines have been disrupted, and international trade has slowed as a result of Shanghai's two-month lockdown and closure of many manufacturing sites around Beijing. The highest annual drop in refineries was caused by weak gasoline demand amid severe restrictions under China's "Not-so-useful" zero COVID policy.

According to data from the Chinese National Bureau of Statistics, Chinese refiners processed roughly 12.7 million Barrels Per Day (BPD) of Crude oil last month, down 10.9 percent from May 2021. Although refinery throughput was somewhat higher in May than in April (12.61 million BPD), refinery production was still low as per the Chinese standards.

When China announced a gradual lifting of the lockdowns in Shanghai and Beijing at the end of last month, refining activities began to revive. Flare-ups since early June have forced officials to impose further mobility restrictions, indicating that China's oil demand recovery will remain bumpy.

This week, a fresh "dramatic" outbreak in Beijing is jeopardizing the recovery of demand growth. Last week, a return of Shanghai lockdowns weighed on oil prices, implying that the Chinese economy will take some time to recover. On the other hand, news that China's oil imports increased by 12% in May compared to the same month a year ago could help prices, albeit this may not be indicative of increased demand.