China's heightened industrial activities temporarily lift the mood in crude oil markets


China's PMI February 2023

China's manufacturing activity in February, judging by its latest data on manufacturing purchasing managers' index, the PMI, has beaten forecast and recorded an impressive record - 52.6%.

It is the most reliable gauge of manufacturing activity in China and an index above and below 50% indicates a growth and contraction respectively; up until December, 2022, the data shows that manufacturing activity has significantly slowed down, only to pick up at the beginning of this year. 

Analysts and investors of the crude oil markets have been looking forward to hearing from China about the PMI in the past few days to make sure the reported, heightened manufacturing activities in China are for real, not just another flash in the pan.

As far as the crude oil markets are concerned, it was good news, indeed. 

In this context, when the markets opened for business on Wednesday, there was a palpable optimism among the investors.  The mood, however, did not last long, as the sentiment was offset, perhaps by the third successive crude build in the US, as announced by the API, American Petroleum Institute, on Tuesday.

The API reported a crude build of over 6.2 million barrels. The data from the EIA, US Energy Information Administration, is expected on Wednesday and estimated not to be very different from that of the API. 

The crude builds in the US indicate that the customers are not using oil, exactly as they used to do in the past, perhaps being sandwiched between high living costs and diminishing purchasing power. 

That means, the crude oil stocks of the world's largest consumer - and the world's largest economy - and the manufacturing activity of the world's second largest economy are seen as the two dominant factors that control the crude oil price right now. In addition, the influence of the current level of price of LNG, liquified natural gas, cannot be ruled out. 

During the early hours on Wednesday, the sentiment of the investors in the crude oil markets seesawed between the two extremes of the influence, fueled by the PMI and the US crude build, before finding a relative equilibrium.

As of 15:37 GMT, WTI, Brent and LNG recorded $76.76, $83.37 and $2.71 respectively.  

The price of LNG, meanwhile, has risen slightly during the past two days; analysts attribute it to the rising tension between the US and Russia over the war in Ukraine, especially after the first year since the escalation and sudden drop in temperatures in Europe and North America.

The slight rise in the price of LNG, coupled with China's rising PMI, may have slowed down a potential, precipitous fall in the price of crude oil in light of massive crude builds in the US. 

China's increased manufacturing activity certainly means a significant demand of crude oil - and of course, gas. The sources of the two commodities, however, may have worried the investors, as China is turning to Russia for both, despite the former being under severe Western sanctions. 

In addition, India is doing the same defying the veiled threats from the West.

Since world's second and third largest importers of crude oil have an alternative source for their respective fuel needs, analysts are worried about the true impact on the demand of crude oil in  the 'legitimate' markets by heightened manufacturing activities in China.

This is the only thing that accounts for the commodity prices remaining in a static state, despite an obvious growth in the Chinese manufacturing activity. 


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