China’s air clean-up could spell trouble for oil price

Authorities in China have ordered hundreds of factories to cut back activity ahead of the Group of 20 summit in Hangzhou in early September, in a bid to ensure clean air, but the restrictions may cut oil demand in the world’s second-biggest oil consumer.

Industry consultant Energy Aspects estimates the curtailments, along with flooding earlier this summer, may cut oil demand in China by 250,000 barrels a day in the third quarter.

The slowdown at facilities including refineries and petrochemical plants along the Yangtze River threatens to weaken Chinese oil imports that rose to record highs in the first half of the year.

Those unprecedented purchases, along with supply disruptions, helped crude rally about 80% from a 12-year low earlier in 2016, and any sustained recovery will hinge on continued strong demand from the world’s biggest energy consumer.

“There is a weather and policy-induced slowdown in China,” said Michal Meidan, an analyst at Energy Aspects.

“While the floods seemed to have died down, we are entering a period ahead of the G20 when there is going to be industrial curtailment. Chinese demand is certainly going to be weak.”

President Xi Jinping is expected to showcase his nation’s strengths at the G20 summit, which will host leaders of countries that account for two-thirds of the world’s population and 85% of its economic output.

China has a history of enacting temporary environmental measures to clean the air before hosting major events, which have affected commodity prices.

Before the 2008 Olympics in Beijing, small coal mines in the northern provinces of Shanxi and Hebei were ordered to shut. That exacerbated a supply shortage of the fuel.