By China Petroleum and Chemical Industry Federation, Sublime China Information (SCI)

China's Petroleum and Chemical Industry Prosperity Index fluctuated amid the recovering of the petroleum and chemical industry

After a rebound in January, China's Petroleum and Chemical Industry Prosperity Index for February 2023 fell to 96.88. The oil and natural gas extraction industry saw mounting inventories as heating demand weakened amid higher temperature while travel demand did not hit a peak. Therefore, Prosperity Index of Petroleum and Natural Gas Extraction Industry drew back from an overly hot state to a relatively hot state. Prosperity Index of Fuel Processing Industry continued its upward trend as driven by the cost-profit ratio, and it enjoyed positive year-on-year gains. The production heat degree of the chemical raw materials and chemical products manufacturing industry improved in line with both upstream and downstream industries, so Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry rose sharply. After benefiting from tailwinds in the short term, Index of Rubber, Plastic Products and Other Polymer Products fell significantly because of uncertainties in longer-term demand. In the whole industry, demand recovery will take time, so it will be inevitable to see fluctuations.  

Market focus

● The US Department of Energy will release another 26 million barrels of strategic reserve of crude oil

The US Department of Energy announced that it will sell another 26 million barrels of crude oil in accordance with the regular sales system (non-emergency sales) after it released 180 million barrels of strategic petroleum reserves on February 15, 2023. The news eased concerns about supply constraints for now. Demand became lackluster, as heating demand weakened amid higher temperature while travel demand did not hit a peak. In the meanwhile, there were many replenishments of crude oil inventories. Therefore, the inventory turnover rate of the oil and natural gas mining industry decreased sharply, and Prosperity Index of Petroleum and Natural Gas Extraction Industry fell back from an overly hot state to a relatively hot state, snapping the five consecutive months of overheating warning.

● EU and G7 imposed price caps on Russian petroleum products

The EU's ban on imports of Russian petroleum products (including refined products) took effect on February 5, 2023.On February 6, the EU and the G7 agreed to set price caps of US$45-100/barrel for Russian oil products. The price caps and the EU embargo sanctions will restrict Russia's energy supply. Russia has decided to trim production by 500 000 barrels of crude oil in March apart from the OPEC framework agreement, which will change the global energy supply and demand structure broadly.

Suggestions and notes

● Market forecast

Regardless short-term fluctuations, market players are still highly confident of the long-term recovery of demand.

● Risk alert

Global warming has shortened the spring and autumn and extended the winter and summer. The temperature and precipitation data in the northern hemisphere indicate that the temperature in the summer of 2023 is likely to be higher than that in the same period of 2022, so players should be vigilant that the winter energy crisis will be evolved into the summer energy crisis.

Overview of China's Petroleum and Chemical Industry Prosperity

In February 2023, China's Petroleum and Chemical Industry Prosperity Index fell back to 96.88, down by 2.46 percentage points from January 2023, but it was still in the normal range. The index lost 4.46 percentage points compared with the same period of 2022, indicating that the downtrend was narrowed. Figure 1 shows the movement of Petroleum and Chemical Industry Prosperity Index and Figure 2 shows the range of Petroleum and Chemical Industry Prosperity Index.

Figure 1 Movement of China’s Petroleum and Chemical Industry Prosperity Index     (historical average level = 100)

Figure 2 Range of China’s Petroleum and Chemical Industry Prosperity Index,           February 2023

February saw rising consumer confidence in China's economic growth. According to data from the National Bureau of Statistics, the PMI rose to 52.6 in February 2023. The portion of new orders increased to 54.1, breaking the record since September 2017; the portion of new export orders rose to 52.4, the highest since March 2011. The second-hand housing markets in many regions of China were recovering significantly owing to the implementation of multiple favorable policies in real estate. In terms of social finance, the portion of RMB loaning increased significantly, up by RMB730.8 billion compared with the same period of last year, and the broad credit kept rising. International-wise, it is likely that China's foreign demand will continue to fall given global central banks’ interest rate hikes, which will exert pressure on exports.

Industry-wise, the production heat degree of the chemical raw materials and chemical products manufacturing industry improved significantly in line with both upstream and downstream industries, so Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry rose by 4.80 percentage points month on month, enjoying the biggest increase among the four sub-indexes (see Table 1). As buoyed by the cost-profit ratio, Prosperity Index of Fuel Processing Industry in February rose 2.46 percentage points month on month and 0.72 percentage points year on year, registering the first positive year-on-year growth among the four sub-industries in 2023. Prosperity Index of Petroleum and Natural Gas Extraction Industry fell by 12.93 percentage points month on month because of the season-driven mounting inventories and a correction in the inventory turnover rate.The production heat degree of rubber, plastic products and other polymer products dropped after the industry benefited from demand tailwinds in the short term, so Index of Rubber, Plastic Products and Other Polymer Products fell significantly. To recap, the whole industry is still in recovering, and hence it will be inevitable to see fluctuations.

Hot spot analysis and future prospects

1. China's real estate market embraces favorable policies again

The rollout of a new favorable policy in February 2023 gave a push for the real estate market. On February 20, the China Securities Regulatory Commission announced the launch of a pilot real estate private equity fund. On February 24, the People's Bank of China and the China Banking and Insurance Regulatory Commission jointly issued the "Opinions on Financial Support for the Development of the Housing Leasing Market (Draft for Comments)", with a total of 17 entries that focus on the direction of structural reform on the supply side of housing leasing, and adheres to supporting the development of specialized and large-scale housing leasing enterprises that take commercial sustainability as the basic premise and own properties, so as to provide diversified, multi-level, full-cycle financial products and services for the investment, development, operation, and management of rental housing. The supportive financial policies for real estate private funding and rental housing market will further promote the rental housing market to be standardized and market-oriented, which will inject new vitality into the real estate demand side.

2. Be alert to the bullish momentum in the bearish oil market environment

In the week ended February 24, crude oil inventories in the US rose by 22.88 million barrels compared with the end of last month (January 27). Despite excessive supply and mounting inventories, oil prices rose. The bullish momentum in the bearish environment suggested market expectations of the continuation of the energy crisis.

3. Future prospect

The correction of China's Petroleum and Chemical Industry Prosperity Index in February 2023 is a normal manifestation of the industry shifting from its differentiation to convergence, and a signal that the demand side has turned from a retaliatory rebound to a long-term recovery. These set the positive upward tone for the whole industry. It should be noted that the bullish momentum in the bearish oil market environment suggests market concerns that the energy crisis will continue and there are still uncertainties in energy supply. In the spring of 2023, the temperature in the Northern Hemisphere with low latitude was slightly higher and the rainfall decreased, which may indicate an evolution from the winter energy crisis to the summer energy crisis, thereby increasing the uncertainty of demand side recovery. The peak season of oil and gas consumption will arrive in advance with the rising of temperature, so it is expected that China's Petroleum and Chemical Industry Prosperity Index will remain stable-to-higher.