VINACHEM

China's appetite for energy is roaring back as its economy recovers from a downturn caused by its draconian zero-COVID policy. Many pundits are worried that a surge in China's imports of crude oil and other energy resources could push those prices higher, fueling inflation worldwide.

"Mobility data over the Lunar New Year holiday are already showing signs of a sharp pickup in travel [by Chinese]," said UBS Global Wealth Management in a report published earlier this month. Given strong demand for gasoline and jet fuel in China, the world's leading wealth manager expects West Texas Intermediate crude futures to hit $107 per barrel this year, lower than last year's high of $130 but 40% higher than the current level.

In the week through Jan. 27, Lunar New Year holiday travels in China reached 90% of pre-pandemic 2019. To meet robust demand for crude, Beijing in early January raised its import quota for 2023 by 20% from the previous year.

Global demand for oil is forecast to reach 101.9 million barrels per day in 2023 -- up 2 million from the previous year and topping demand highs for the first time in three years, according to the International Energy Agency. In China, demand is expected to grow by 900,000 bpd, accounting for nearly half of the projected increase worldwide.

Still, overseas travel by Chinese has yet to recover fully. Many experts expect a sharp rise in oil prices and a deepening shortage toward the second half of the year. Goldman Sachs sees Brent crude futures gradually rising to $100 by December and staying there in 2024.

Meanwhile, supply is unlikely to pick up anytime soon as OPEC Plus, which includes non-OPEC countries like Russia, is expected to continue large output cuts. Moscow also announced a further reduction in oil output as a protest against economic sanctions by the U.S. and European countries. U.S. shale oil production is unlikely to increase sharply in the near future.

The price of natural gas, the main source of inflation in Europe, has declined more than 80% from its peak and remains low amid mild winter weather. Its outlook depends on whether China will "return" to the spot market for liquefied natural gas.

Last year, China was largely absent from the spot market because its gas consumption had slowed amid a weak economy, enabling it to meet most of its needs from long-term contracts, according to Norwegian research company Rystad Energy. Spot transactions only accounted for 10% of China's LNG procurement last year, down from 40% in 2021. This allowed Europe to import enough LNG to avoid a serious gas shortage.

China has been shifting to long-term contracts in LNG over the past few years. "Beijing should be able to cover most of this year's increase in LNG imports with long-term contracts," said Masanori Odaka, a senior analyst at Rystad. Still, if domestic demand rises, China may end up competing with Europe in the spot market.

If the Chinese economy recovers rapidly, global efforts to tame inflation could prove ineffective. The International Monetary Fund forecasts the Chinese economy to grow 5.2% in 2023, up from 3% in 2022. If China increases its growth rate by 2 percentage points, that could lift an international commodity price index about 4%, offsetting slow growth in the U.S. and Europe, said Jun Inoue, a senior economist at Mizuho Research & Technologies.

While overall inflation may have peaked for the time being in the U.S. and Europe, price indicators have not come down as expected in America due to a resurgence in gasoline and other energy prices. Many fear China's growing hunger for energy could further accelerate inflation in the U.S. and elsewhere.  – Asia Nikkei –