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China Single-Handedly Props Up Oil Prices

With India in the clutches of a new wave of Covid-19 infections that has all but locked the country down, China has remained the one big oil consumer that is thriving and driving demand up.

Bloomberg reports that factory activity in Asia’s powerhouse has returned to pre-pandemic levels. So, too, has traffic. Both are strong, bullish factors for oil prices.

One analyst told the news outlet that demand for oil in China next month could be as much as 20 percent higher than it was in May 2019, thanks to these developments.

China has been stocking up on crude for months now, with record-high import rates fueling a prolonged rally in oil prices. This is about to end, however, as refineries shut down for regular annual maintenance. Data on other indicators related to oil demand, such as the ones cited by Bloomberg, though, should be sufficient to keep prices higher.

Developments in India are weighing on the bullish sentiment, however. Reports that a third mutation of the coronavirus has been detected in parts of the country, which is reporting a quarter of a million new daily cases, have further heightened the uncertainty.

China has been the key reason for oil prices improving relatively quickly from the worst of the crisis last year. The country got the spread of the infection under control a lot more rapidly than other countries. As such, it started returning to normal, mainly in terms of industrial activity.

As it took advantage of superlow prices for crude last spring, China stocked up on the commodity to fill its strategic reserves, pushing prices higher. The buying continued for months, helping alleviate a vast global overhang in inventories. Yet, to the joy of oil bulls, China continued buying oil even after its strategic reserve was full, as demand for products and services, at least locally, began to pick up.

Yet even China cannot push prices as high as some of the world’s largest producers would like them to go.

According to various forecasts, the outlook for benchmark prices over the short term ranges between $60 and $70 per barrel.

By Irina Slav for Oilprice.com

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