China’s Message to the Oil Market

China’s Message to the Oil Market

China, the first country hit by the Covid-19 outbreak has also been the first to recover from it.

The world’s second-largest oil consumer gets back to business. Traders are searching for clues as to how the recovery pans out and what this could mean for the rest of the world. The picture is murkier than the markets think.

Countries around the world are in different stages of their confinement measures and many are now grappling with their exit strategies. Looking to China, the decision to finally convene the country’s parliamentary session later this week postponed from March, suggests that Beijing is confident that the epidemic is under control and recovery is finally at hand.

Travel restrictions and quarantines have taken a huge toll on China’s oil product demand which fell by 25% in February from 13.5m barrels a day in December, equal to Germany’s total product consumption.

As China gets back to normal, policymakers and consumers remain cautious.

Just one month ago, US oil prices turned negative for the first time in history. Today, oil is back above $30 a barrel yet still half of the level it was at the start of the year. The market has rebounded because of deep supply cuts that negative prices accelerated across the industry. These cuts have been painful for the industry but are a necessary step given the collapse in consumption caused by the coronavirus pandemic.

Of greater long-term importance for the health of the oil market over the rest of 2020 will be whether the rebound continues as lockdowns ease and the world attempts to get back to a semblance of normality.

When lockdowns were at their peak last month global oil demand was down from 100 m barrels a day as much as 25% or more, with jet fuel and petrol consumption the hardest hit.

The prognosis for oil is good.

Neil G Van Luven

Neil G Van Luven signature

President of the Crude Oil Investment Club