Oil Price: US Intervention, falling crude inventories and China's energy woes cause ripples in the crude oil markets

 

Chinese coal imports

The price of crude oil fell again on Friday, having crossed the psychologically significant $80 a barrel for Brent on Wednesday, wiping off the gains of the last two days.

As of 09:30 GMT, the prices were at $74.26 and $77.60 respectively.

The sentiments that triggered off the fall may have stemmed from the combination of three crucial factors: the explicit US intervention, asking the OPEC+ to produce more oil soon as the prices at this level are damaging to the global economy; rising US crude inventories, despite the forecasts to the contrary; China’s power shortages, coupled with slowing economy and growing political rivalries with its regional neighbours – and beyond.

The unusual announcement by Jake Sullivan, the US National Security Advisor that he would take up the issue of rising oil price with Saudi Arabia, the de factor leader of the OPEC, despite that not being in the administrative domain of the top official, immediately affected the crude oil markets. On Thursday, Jen Psaki, the White House Press Secretary, expressed the same sentiment.

Analysts believe that the OPEC+ will not be able to resist the move this time, especially when the next meeting of the cartel is just  a couple of days away.

On one hand, the relation between Saudi Arabia and the US is at an all-time-low at present and it is highly unlikely that the Kingdom would take any measure to widen the gap even further at the expense of its own security.

On the other hand, the US will release some of its vast Strategic Petroleum Reserves, if it does not see any progress on this front and its pleas fall on deaf ears of the major producers in the Middle East.

The US crude oil inventories, meanwhile, rose sharply eclipsing the predictions of rising demand: the API, American Petroleum Institute, said this week there was a build of 4.127 million barrels in the US crude inventories, when the forecast was a loss of 2.33 million barrels.

The multiple concerns about the state of Chinese economy, meanwhile, tower above the other factors by a wide margin as far as the crude oil markets are concerned.

At present, crude oil markets are baffled by the conflicting signals that come from China: on one hand, China, in line with the developed world, is pledging to cut down on its use of coal for energy generation; on the other hand, faced with power shortages in certain regions, it appears to be gearing up to import oil, gas and of course, coal at ‘all cost’.

If the worrying developments in China, the world’s second largest economy, are not addressed in time, it will spread like wild fire in the South East Asia much faster than policy makers anticipate; the markets in the region are already jittery over inevitable supply-chain issues.

Unfortunately, if remedial collective measures are not taken in time, it will not just be limited to the region in question. It will spill over to the rest of the world in no time.

The shortage of computer chips and its impact on global manufacturing, especially in the car productions,  is a classic case in point.

It is true that China is coming down hard on certain sectors in order to curb what it sees as the wanton excesses of the capitalism - under the slogan of ‘common prosperity’.

President Xi, who hails from rural China – and then gradually rose to the top position – must have seen the damage to the society on his watch in general, in the absence of certain ‘brakes’; time and again, he highlighted the corruption of certain officials and some sections of China’s vast economy.

In short, President Xi must have felt that the exponential growth of the Chinese economy at the expense of its rural communities is neither sustainable nor socially cohesive that could, in the end, result in an alarming internal migration in search of prosperity.

The numbers speak for themselves: in 2010, China’s rural and urban population stood at 671 million and 669 million respectively. In 2020, according to the latest census, the same figures stood at 509 million and 901 million respectively – nearly doubled - showing the gravity of the challenge faced by China.

The migration that had been increasing over a decade must have given the impetus for over-zealous developers to embark upon gigantic projects to make apartments, disparagingly termed as ‘concrete jungles’, a significant number of which just lie vacant that in turn has now become the focus of the international financiers.

The financial woes of the troubled Evergrande, in this context, may be just the tip of a very large iceberg.

Analysts hope China will take the interests of its neighbours and the West much more seriously in order to tackle the serious internal issues, some of which are inextricable linked to the various external players; the coal issue involving Australia is a case in point.

Recently, President Xi made a call to President Biden and by coincidence the Chief Financial Officer of the mobile giant, Huawei, saw her freedom along with that of two Canadian citizens.

The quiet diplomacy that worked in this case, if extended,  has the potential to make similar changes in many other areas of global significance, if leaders look beyond their immediate political realms.

 

 

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