Falling Crude Oil Prices and China Slowdown Fears

December 07, 2022 11:03

In the middle of a sharp and sudden decline in crude oil spot prices and China slowdown fears, the markets are watching for key macroeconomic data that might mean the difference between global growth and recession in the short term.

Crude oil spot prices have dropped from peaks of around 122 USD per barrel seen in summer and are heading towards 70 USD per barrel at the time of writing. When the war in Ukraine and uncertainty over energy supplies from the region is taken into consideration, this is an unexpected turn of events supporting the world economy’s efforts to pull away from the COVID-19 pandemic.

At the fundamental supply level, US crude oil inventories fell by 12.58 million barrels in the week ending November 25. New data is coming up later today and the consensus sees a drop of 3.305 million barrels in the week ending December 2. This appears to indicate healthy demand and available supply. Are we reaching the point where demand and supply are reaching a balance after three quarters of volatility in the energy markets?

China eases COVID-19 restrictions

A lot depends on the world’s second largest economy, China. After nearly three years of COVID zero tolerance, it emerged that China’s government eased restrictions today, dropping the requirement for people to show negative tests to travel within the country. Local production will only be locked down if the area is high risk, meaning that industrial productivity will likely rise in the short to medium term.

Improved industrial production in China will support growth expectations and might also influence inflation in the country. We’ll get an insight on Thursday when China’s Inflation Rate for November will be released. Previously at the level of 2.1 percent, the consensus sees the latest results at the level of 1.6 percent on an annual basis. Unlike the US economy, China’s economy didn’t overheat in the wake of the pandemic because of lockdown measures in key industrial regions, meaning that inflation is still relatively low. Then again, there’s a mountain to climb before China returns to its usual growth rates.

China’s Producer Price Index (PPI) data is another key release to watch on Thursday. PPI for November is seen at the level of minus 1.4 percent this year compared with the previous level of minus 1.3 percent on an annual basis. Compare this with the year-on-year US PPI reading expectations due out on Friday. Seen at the level of 7.2 percent in November this year and previously at the level of 8 percent in 2021, energy inflation fed into producer prices in the US.

In summary, there is more uncertainty over global growth ahead and contrasting performances between the world’s two largest economies. This view is underscored by the International Monetary Fund (IMF) which recently said a global slowdown is underway. The IMF recently lowered its global growth forecast for 2022 by 0.4 percent to 3.2 percent, and by 0.9 percent to 2.7 percent in 2023.

“Although this baseline is subject to exceptional uncertainty, the risks are weighted heavily to the downside and recession concerns are rising.” IMF Fall 2022 MENA Regional Economic Outlook.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.