FIS: Crude Oil Market Overview: Chinese Problems Weigh on Market

Chinese Premier Xi Jinping has reasserted his commitment to the zero covid policy, something that has had a dramatic effect on the Chinese economy over the past year.

Chinese GDP figures have come in well below target rates. Year-on-year the country’s economy grew 3.9%, far lower than the target rate of 5.5%.

This coupled with the fragile situation of China’s property market is making markets concerned over the economic health of the world’s largest oil consumer. Without the considerable growth and consumption of China in the near term, things look less bullish for the oil markets even with the OPEC+ production cuts. 

The economic headwinds are not only limited to China with many countries still struggling to fight inflation and now faced with increased costs of borrowing.

With little sign that the US Federal Reserve will alter its interest rate policy, and the knock-on effects to other economies, the global trend of monetary tightening looks set to continue. The strong moves to curtail inflation have further raised fears of a ‘hard landing’ for the world’ economies. Lower growth and spending would have a negative effect on oil consumption worldwide and be a serious drag on prices.

U.S. Midterms and Oil Politics

With the U.S. Midterm elections on the 8th November, the politicisation of the oil markets has begun as President Biden looks to lower oil prices ahead of the national poll. US voters look likely to punish the incumbent administration as the Republican opposition are favourites to take control of the House, and the Senate is not guaranteed to stay Democrat controlled.

According to EIA data, current gasoline prices are on average more than 70% higher than average prices in 2020 when President Biden was elected. The pressure on American’s budgets is souring attitudes towards the administration and making the US Government look towards using more of the Strategic Petroleum Reserve to bring down domestic prices. 

As reported by the FT, David Goldwyn, a former senior energy official in the administration of Barack Obama “I think we are in a new era of much more nimble and deft use of the SPR as both a market and a geopolitical tool.” As President Biden’s recent trip to the Middle East did not produce the result he wanted, with OPEC+ subsequently deciding to cut rather than increase production, America has had to look domestically to resolve high prices.

The conflict in Ukraine still looks far from resolving which means that any significant return of Russian oil supplies to Western markets a non-starter. Oil supplies have to be made up elsewhere and quickly. With the most obvious source of Iran off the table now that talks over reviving the 2015 nuclear deal are all but dead, countries are looking to their own shores to quickly develop energy resources.

The record drawdown in stocks in March has left stocks at their lowest levels since the 1980s. Dangerously low according to some political opponents and a blatant politically motivated attempt to lower prices in the short term in the lead up to the midterm elections.

A similar attempt by Bill Clinton to lower prices at the pump in advance of the 2000 election, where Al Gore controversially lost to George W Bush was similarly criticised.

Written by Chris Hudson, Archie Smith and Jack Shilling, Edited by Chris Hudson (https://freightinvestorservices.com/fis-live/).