Crude Oil Rebounds Amidst Promising News from China

Oil

While many marveled at the tremendous growth that we have seen in the Chinese economy in recent times, we knew that this sort of growth rate could not continue forever. We’re already seeing signs of concern here, where by any measure, we could call this a slowdown, a genuine one.

One of the real key indicators is how much Chinese tax revenue has fallen in the fourth quarter of 2018, and the reduction has been pretty dramatic indeed. In the previous 9 months, the lowest monthly tax revenue reported was in June, where $83.8 billion was collected.

We have the data for October and November now, and we’ve seen this fall from $110.2 billion in September, to $32.1 billion in October, and dropping all the way to $17 billion in November.

These are among the numbers being looked at by Chinese officials, and this does indicate that we are headed in the wrong direction here and rather quickly at that. Much of the growth of the Chinese economy has been precipitated by government involvement, and this is after all a totalitarian government, so they certainly aren’t the sort to let things like public opinion get them off course to do what they feel needs to be done.

While the tax revenue numbers may be shocking, it’s been 10 years since China has put in total factor productivity growth numbers north of 2%, where we used to see this number as high as 5% or 6% during the first 7 years of the new century.

China Is Not Afraid to Step Up When Necessary

China certainly wasn’t afraid to act during the onset of the Great Recession and opened up the vaults in fact with all the lending they did and the money they spent. It appears that the time for more action is upon us, and Chinese officials have announced that they may indeed intend to come to the rescue of their at least relatively ailing economic growth levels.

The prospect of a trade war with the United States hasn’t made this situation any easier to manage or bear, and when you have two heavyweight economies such as China and the United States doing battle, this doesn’t generally tend to lead to a good outcome.

Crude oil, like all commodities, and like everything else offered in markets in fact, depends upon maintaining and increasing demand to prosper. If such a big oil consumer as China falters, this will indeed have an impact upon global oil prices.

China currently imports over 5 million barrels of oil a day, consuming over half of all imported oil in the world. How China goes therefore impacts the price of oil significantly, and seeing this drop can and does impact prices a lot.

It is not surprising then that when China announces that it is considering providing a stimulus to their economy, oil traders and oil producers take this as welcome news. As concerning as the economic data out of China has been, it is at least reassuring that the Chinese government is on duty and has expressed a desire to take action to stabilize the loss of growth that it has experienced and is experiencing.

This announcement propelled the price of oil to rise by 3% on Tuesday, in addition to equity markets also putting in gains, albeit more modest ones than crude oil enjoyed.

This more than offset the 2% loss on Monday that is blamed on new data from China that clearly indicated their economy is continuing to slow and stoked fears that China’s demand for oil is headed in the wrong direction.

There really isn’t much question about that, and the variable part of this equation is what response China may be willing to make to look to reduce the impact of this. Today, we at least got the news that this is not going by unnoticed by the Chinese and that they are motivated to help their economy deal with this at least somewhat.

China’s National Development and Reform Commission indicated that they might be willing to provide some fiscal stimulus to their economy, and while the key word here is “might,” that at least provides some hope for oil traders and the oil industry.

Keeping Production Under Control is Also Key

OPEC has also come to the aid of oil prices, who decided in late 2018 to cut back on production this month, another move which benefits the price of oil, by reducing supply. The U.S., now the world’s top oil producer, has recently seen reductions in production as well, with recent news indicating that stockpiles have dropped.

The price of oil has followed stocks in the fourth quarter of 2018, with the pullback in oil more than doubling the 20% haircut that stocks got during this time. Like the stock market, the price of oil enjoyed their own Santa Claus rally by adding about $10 a barrel since, although we’re still short by about $25 more a barrel from where we were at the beginning of last October.

We are currently at a resistance point from the levels we saw in early to mid-December, and to get over that hump, we’re going to need even more good news, but this is at least a start. The best news may be that this can be controlled to a large degree on the production side of things, and we may see more moves to cut back if warranted.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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