Volatility in Crude Oil Markets: is concern over the Chinese economy, a major factor?



The volatility in the energy markets continues amidst growing uncertainty over the global economic growth, despite the catastrophic impact on the world from the Covid-19 virus clearly behind us. 

As far as the crude oil markets are concerned, there was a significant fall in the prices on Tuesday, when the API, American Petroleum Institute, said in its weekly report that there was a crude build during the past week; it was much bigger than its own estimate for the same period.

According to the API, there was a crude build of 1.618 million barrels, when the estimate was 1.2 million barrels.

The EIA, US Energy Information Administration, meanwhile, reported on Wednesday even a larger crude build - 8.5 million barrels during the last week.

US crude oil build in May - EIA

As expected, a sizeable build of this kind triggers off a fall in oil price and that's exactly what happened on Tuesday - in the run-up to the release of the report and in its aftermath.

On Wednesday, however, the prices have recovered temporarily: as of 10:15 GMT, the prices of WTI and Brent were at $103.12 and $105.80 respectively. 

The crude build is not the only factor that is behind the looming volatility, of  course, in addition to the conflict in Ukraine and the impact on European energy markets due to ban on Russian fuels.

Analysts are now more concerned about China, the world's second largest consumer of crude oil.

According to National Bureau of Statistics of China, country's PMI, Purchasing Manager's Index, a key indicator that shows the strength of the economy, has dropped by nearly 3.2%; in addition, the economy has shrunk too, although its turning negative is highly unlikely. 

Since two consecutive negative growths spell the dreaded 'R' word, a recession, economists are really concerned about the situation in China at present; some even talk about 'local recessions', referring to the economic situation on regional basis in the vast, world's most populous nation. 

China has been pursuing a Zero-Covid strategy with an iron fist since the first Coronavirus outbreak. Recently, in the face of a serious outbreak of Omicron variant, especially in Shanghai and Beijing, it extended the lockdowns with tough measures - affecting over 300 million people; some critics brand them as draconian. 

 

As expected, in these circumstances, people spend less and become less mobile that in turn affect the demand for petroleum products - for obvious reasons.   

Rising diesel prices, meanwhile, are pushing the transport costs that in turn push the inflation even higher from the current disastrous levels.



Economists fear that the Eurozone will slip into recession unless the EU agrees on a cohesive plan to dealing with Russian oil and gas.

There are signs that the unity we saw in February, just after Russian invasion of Ukraine,  is full of cracks at present due to lack of alternatives on energy front and ambitious extensions of the ban into other areas such as shipping; Greece, for instance, is vehemently up against the latter.

Since the OPEC+ is not going to increase the production to mitigate the impact on the global growth by high oil prices, the status quo may remain for months to come, despite fluctuations based on short-lived sentiments. 

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