This week: China brings fear and excitement to the oil markets

This week: China brings fear and excitement to the oil markets
This week: China brings fear and excitement to the oil markets
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  • China’s Lunar New Year holiday brings fear and excitement to oil
  • Chinese factories are closing for at least a week, causing a temporary jump in demand
  • When reopening, Chinese demand for oil and raw materials is usually too high
  • The coronavirus crisis in China may change the post-holiday narrative this year
  • It’s the time of year when commodity traders get nervous and excited in almost equal measure

The Lunar New Year in China, which began this weekend, is officially celebrated for a week, with some businesses and factories closed for a longer period.

When reopening, Chinese industries often see turbocharged operations to make up for more than they didn’t consume during the holidays. This is what the oil bulls are counting on. China’s demand for crude oil will explode from February onwards, adding to the price recovery that started in mid-January.

This year, though, something could change the situation in China after the Lunar New Year and, in turn, the demand for oil, base metals and other raw materials in China. These are the repercussions of the Covid crisis in the country.

Health experts are predicting massive new spikes in coronavirus cases, with Chinese people going out and mixing freely for the first time in three years after Beijing revoked all safeguards it had put in place since the country’s first coronavirus outbreak in 2020.

China’s Ministry of Transport estimates more than 2 billion passenger trips will take place during the Lunar New Year season, which in some parts of the country lasts up to 40 days as people return to remote cities for a reunion. If true, that’s great for fuel demand.

On the other hand, the number of COVID patients requiring critical care in Chinese hospitals has peaked. Nearly 60,000 people died in Chinese hospitals between December 8 and January 12 due to complications from the virus after China, under public pressure, abruptly canceled its “no spread of coronavirus” policy.

WHO’s executive director for health emergencies, Mike Ryan, suggested earlier this month that China’s health data “does not represent the true impact of COVID-19”. [الفيروس التاجي]in terms of admissions to hospitals and intensive care units, as well as deaths.

Wu Zunyu, chief epidemiologist at the Chinese Center for Disease Control and Prevention, said on Saturday — the eve of the Lunar New Year — that “the current epidemic wave has already infected about 80% of people” from 1.4. billion people. He pointed out that with such large numbers of infected people, China may have been heading towards full immunity from the virus, which means minimal risk of hospitalizations and deaths.

Facts show that China’s economy ended 2022 in a deep recession. Factory activity in the country shrank in December at the fastest pace in nearly three years. The official manufacturing PMI fell to 47 last month from 48 in November, according to the National Bureau of Statistics. This was the largest decline since February 2020, and the third consecutive month of contraction for the index.

China’s non-manufacturing PMI, which measures activity in the services sector, fell to 41.6 last month from 46.7 in November. It also marked the lowest level in nearly three years. Although the government has boosted its support for the real estate market, the effects are still slow to take effect – home sales fell again in December.

John Kilduff, founding partner at New York-based energy hedge fund Capital Again, said:

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“The oil bet on China is huge, and people will be watching the country’s industrial data like hardliners from next month to draw conclusions about demand for crude oil and fuel. The oil bulls expect the crude oil outright import numbers, as well as the country’s purchasing managers’ indices, to be higher than expected. In order to maintain the runaway demand hypothesis. Without that, oil could return to its December lows.”

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While rising demand in China will undoubtedly be bullish for oil, a potential recession in the US and other major western economies could hamper crude oil consumption this year. The United States and most of the region are struggling with rising inflation and tight monetary policy, which is expected to continue throughout the year, and form the basis for a recession.

The United States publishes its first estimate of fourth-quarter gross domestic product on Thursday, with analysts expecting the economy to expand 2.6% year-on-year, after 3.2% in the third quarter.

While these numbers look solid, recent economic data indicated the economy is losing momentum at the end of 2022 – retail sales have fallen 1% or more in the past two months, industrial production has fallen for the past three months and residential construction has posted six consecutive monthly declines.

GDP is expected to weaken in the coming quarters as sharp interest rate increases by the Fed continue to weigh on demand.

The economic calendar also includes data on Initial Jobless Claims, Durable Goods Orders and New Home Sales on Thursday and the Personal Consumption Price Index on Friday.

US debt ceiling

Also in focus this week is the US debt ceiling standoff, which is likely to loom large over financial markets as earnings season continues in the US.

The US government reached its borrowing limit of 31.4 trillion on Thursday amid a row between Republican Republicans and Democrats over President Joe Biden over raising the country’s debt ceiling. House Republicans want cuts in government spending before agreeing to a higher cap; A similar request in 2011 prompted S&P to downgrade the US credit rating for the first time and caused chaos in financial markets.

The high-stakes stalemate is widely expected to last for months and could reach the last minute as each side tests the other before June – the date after which the Treasury may exhaust contingency maneuvers to ward off a default.

“From an economic and financial perspective, failure to raise the debt ceiling would be an unmitigated disaster,” said David Kelly, chief global strategist for JPMorgan Chase & Co funds.

Disclaimer: Parani Krishnan bases his analyzes on some contradictory opinions just to diversify and showcase different theses in the markets. In support of neutrality, Barany presents several perspectives and variables during his analysis of the markets. In the interest of transparency, we would like to inform you that Barani does not trade in any of the commodities or securities that he analyzes and writes about.

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