The phone call between the two economic superpowers ignites the optimism in the crude oil markets

 

The phone call between President Biden and President Xi of China, after a lull of seven months since the first of that kind being made, helped Asian markets make some gains in the early hours of trading. It is felt in the crude oil markets as well.

Following the unexpected conversation, both sides said it was ‘candid’.

Never in the recent history of the world, have the two top world economies seen a growing mutual animosity between them, which affects the global economy in many different ways; that’s why the thaw, no matter how illusive it may be in the long run, has such a positive impact on the markets worldwide that often are caught between in the tussle between two economic superpowers.

The crude oil markets breathed a sigh of relief yesterday too; the oil price made a strong recovery.

The reports of China’s recent tendency to tap its oil reserves, in order to mitigate the impact on the domestic energy costs, brought down the price of oil yesterday, having recorded a strong recovery from earlier losses.

China’s National Statistics Bureau admitted recently that the hike in the price of raw materials did affect its economic performance in the second quarter. Although it did not identify the rising oil prices as the main culprit, a catalogue of news reports indicates that the former is a serious cause for concern for the Chinese.

Since China successfully controlled the latest outbreaks of the Delta variant of the Coronavirus, analysts – as well as the Chinese investors – expected a significant growth in demand for crude oil as the transport sector and traffic slowly return to normalcy.

The rising energy costs, however, has hampered the anticipated awakening. Since the appeals for rise in production, along with the other world powers, do not appear to be bearing fruit, the Chinese have resorted to tapping its reserves to manage the crisis to some extent – at the expense of its oil imports, of course.

China is not the only country that embraced the new trend of tapping the oil reserves. India has been in the news for doing the same in the past few weeks and so has South Korea.

The OPEC+ producers are not immune to the impact of these moves by the world’s top crude top importers: Saudi Arabia, for instance, reduced its oil price for Asian on Sunday last week by more than $1.00 - a significant move; Nigeria, one of India’s top sellers, meanwhile, according to Bloomberg, has admitted that nearly 2/3 of its oil export for October was yet to find a buyer; India’s imports from Nigeria, according to the report, has plummeted from 20 million barrels to a mere trickle – just to 2 million barrels!

The OPEC+, meanwhile, is under pressure from the US to increase the production – along with the rest of the major global buyers too. Although the cartel has not heeded the call yet, it will not be able to resist the move for long, because the security of some of the main Middle Eastern buyers is inextricably linked to the US presence in the region and of course, US military hardware.

Without the Patriotic Missile defence system, for instance, Saudi Arabia’s very existence will be under threat. The Kingdom is under attack on daily basis by the explosive-laden drones and missiles fired by Houthis from the neighbouring Yemen.

The reality was publicly articulated by none other than President Trump while in office, when his frustration grew over the Kingdom’s inability to increase the output to curb the rising oil prices: “Saudi Arabia will not last more than two weeks without the US military support,” berated Mr Trump on one occasion!

Of course, the oil producers suffered very badly when the price crashed during the pandemic. In this context, it makes sense when they try to recover some of the earlier losses in order to survive in the sector.

In addition, the oil producers in the Middle East provide direct employment opportunities to millions of people from the poorer parts of Asia, whose regular remittances provide the respective countries with a lifeline to maintain their economies, most of which are badly hit by the pandemic.

In this context, it is important to maintain s sustainable crude oil price that saves both consumers and producers, as the mutual survival of both is the need of the hour.