What is next for China - Oil Demand and Economic Outlook - August 2024
Paul Young
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The price of crude oil is struggling once again after it rebounded from the early-August financial market sell-off. WTI crude is hovering around the US$75/bbl mark. With tensions in the Middle East cooling in recent days, oil market participants are now wondering about a range of uncertainties on both the global oil supply and demand fronts.
Of prominence, the outlook for global demand has turned more ominous, which was highlighted by the International Energy Agency’s (IEA’s) August Oil Market Report. The IEA maintained its forecast for global oil demand to increase by an average of slightly less than 1.0 mb/d in both 2024 and 2025. This is the same as the previous month’s report but down from April’s growth projections of 1.2 mb/d and 1.1 mb/d, respectively, for 2024 and 2025. Moreover, the accompanying commentary suggests risks are skewed to the downside. Notably, the agency revealed that oil demand from China—the second largest consumer in the world after the U.S. and the largest contributor to incremental growth in global oil demand—contracted for a third straight month in June, while preliminary merchandise trade data pointed to further weakness in July. It appears that the rapid adoption of electric vehicles (accounting for over 50% of new motor vehicles sales) is having an increasing impact and raising concerns that the Middle Kingdom could be approaching peak oil demand much earlier than previously projected. On the flip side, strong demand by America’s drivers has helped offset some of the decline in China; however, this may prove unsustainable once the summer driving season ends.
Softer global oil demand is not what OPEC+ was envisioning at this point in 2024, which will further complicate its desire to roll back production curbs, specifically to phase out additional voluntary cuts of 2.2 mb/d in the fall. Note that the cartel has been much more bullish on global oil demand than the IEA, with its latest projections still showing hefty increases of 2.1 mb/d in 2024 and 1.8 mb/d in 2025. Such optimism on the demand picture may explain why OPEC+ felt confident enough in June to openly signal that it could begin to increase production this October.
The good news for OPEC+ and other major oil-producing nations is that the cartel has remained nimble and quite cohesive in recent years and, thus appears ready to change tactics when called for. This was demonstrated at the Joint Ministerial Monitoring Committee meeting held on August 1, where the cartel stated that “the gradual phase-out of the voluntary reduction of oil production could be paused or reversed, depending on prevailing market conditions”. Still, if the cartel truly wants to ease the market’s (growing) concern that the global oil demand/supply balance may swing back into a large surplus position, it will need to take more forceful action in the coming weeks, including providing clearer numbers on the pace/scale of production increases or simply extending the timeline of the current production cut strategy.
Key Takeaway: The longer OPEC+ waits to clarify its production strategy, the more nervous we suspect the oil market will become over the risk of global supply rising. Suffice it to say this could place greater downward pressure on crude oil prices in the near term.
China has been facing economic trouble for the past few quarters -
A growing chorus of Chinese economists called on Beijing to break away from an implicit budget deficit ceiling, opening the door to more central government borrowing as a way to shore up the faltering economy.
Officials can consider doubling or tripling this year’s special sovereign bonds to as much as 3 trillion yuan ($420 billion), said Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, a top government think tank. This should go toward subsidizing consumers and alleviating local government debt risks, he added.
The deficit ceiling of 3% to gross domestic product should also be increased to give the Ministry of Finance more policy flexibility, he said in a note on WeChat.?
That’s not without precedent. China made a rare revision to its deficit ratio in October last year to 3.8% of GDP from the original 3%, resulting in the sale of 1 trillion yuan of additional sovereign bonds. This year, it set the ratio at 3% again — a limit it has long tried to keep to maintain fiscal discipline and project a positive view of the economy.
China:
Although the country remains a manufacturing powerhouse, domestic demand is weak, partly because consumption is being dragged down by the property market slump.
Source - https://www.irishtimes.com/business/2024/08/23/china-faces-serious-short-term-economic-challenges/
I have authored many articles on China over the years - https://medium.com/@paulyoung_81567/what-is-next-for-china-ac3151a4a698 or https://www.slideshare.net/slideshow/china-path-to-global-domination-march-2022/251345531
Paul Young CPA CGA (1996)
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Paul is a former IBM Customer Success Manager that has deployed over 300 data and AI solutions across industry and geographies for the past 8 years. Paul is a Financial Planning, Analysis, and Reporting SME working with data including integration of macro and micro indicators as part of the integrated business planning and reporting cycle.
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