Oil tries to recover with more positive numbers

17 Mayıs 2024

Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

 

Oil tries to recover from the May bottom with more positive numbers for the Chinese economy.

Crude oil is rising this morning by approximately 0.3% for both major benchmarks, Brent and West Texas Intermediate (WTI). While prices are still moving almost sideways since the beginning of this May and near the lowest levels since March.

Today’s oil gains come with more positive signs about the future of demand from China, with faster-than-expected growth in industrial production and more strong growth in fixed asset investments excluding property investments.

Industry outputs grew by 6.7% in April on an annual basis, far from expectations of growth of 5.5%, in addition to the unexpected slowdown in fixed asset investment growth to 4.2% from 4.5% on an annual basis for the first four months of this year.

However, the contraction in property investments by 9.8% is what led to this weak reading, as if this item was excluded, investments would have grown by 8.9%, according to the National Bureau of Statistics (NBS), which emphasized the role of government support in the investment growth.

Also, we saw an unexpected slowdown in retail sales from 3.1% to 2.3%, which represents the worst growth rate since December 2022. Moreover, new home prices contracted at the fastest pace since 2014 by 0.58% on a monthly basis in April.

I believe that today’s figures reinforce the scene of division in the Chinese economy, but the demand for crude may continue to grow, which may lead to the sustainability of the recovery in crude prices despite the weakness in internal demand from households, the decline in house prices, and a severe contraction in credit demand in exchange for the growth of manufacturing, services and investment activities.

Despite these weaknesses in the Chinese economy, forecasts indicate further growth in demand for oil from the largest manufacturer in the world, as the US Energy Information Administration (EIA) raised its expectations for crude consumption by 0.4% and 0.9% for the years 2024 and 2025, respectively earlier this month compared to the previous forecasts. On the other hand, forecasts about global consumption were reduced by 0.1% for this year, and therefore the growth in demand from China will play a pivotal role in driving global demand.

This narrative pushes us to focus on China’s trading partners abroad, focusing more on exports to support demand rather than on weak internal demand.

The United States is indeed continuing to record further acceleration in its economic activity over the past months, despite some signs of weakness last April, but on the other hand, the EIA has reduced its forecasts for oil demand by 0.4% for the current year. While the higher for longer interest rates may lead to a return to weak economic activity and a decline in oil consumption, in addition to the threat posed by the expansion of the trade war between the United States and China, which may reduce the volume of trade.

The Eurozone, on the other hand, continues to show more signs of returning to life through the return of growth in service activities and the cohesion of the labor market, in addition to sentiment about the possibility of halting the contraction in manufacturing activities and the growing confidence in the region’s economy. This is what was indicated by recent surveys, both from ZEW and Ifo, and various PMI reports.

 

Zaid Barem- YMM