Oil price: a slight rise in China's Manufacturing PMI pushes the oil prices up


China's Manufacturing Managers' PMI - June
China's Manufacturing Managers' PMI for June, 2023

China, the world's second largest economy, released its monthly data on Manufacturing Purchasing Managers' Index, known as the PMI, that is a key indicator of the manufacturing activity of the country. 

It has risen by 0.2% from the previous index, 48.8%, in May this year. 

Although numerically insignificant for causing an earth-shattering movement in the current markets sentiments, it, nevertheless,  is a positive sign in the current economic atmosphere that is not short of news about doom-and-gloom - and for multiple reasons.  

China, with the release of the latest data, acknowledged that the rise in the PMI can be attributed to the growth in the large and medium scale industries; the growth of small scale industries, by contrast, has slowed during the same period.

In short, there is no room for complacency; China is not out of the woods yet.

The price of oil, perhaps went up slightly on Friday in anticipation of some encouraging economic data from China; it went above the psychologically-sensitive $70 mark.

Weekly oil price in June, 2023
Weekly oil price -June, 2023

In addition, the substantial fall in the US crude stocks and the Saudi production cuts, announced for July and beyond, may have played some role in the slight rise in the prices of crude oil.

As of 19:00 GMT, the prices of WTI and Brent were at $70.64 and $75.41 respectively. The price of LNG, liquified natural gas, meanwhile, saw a significant increase of over 3.5% and stood at $2.80, defying the market logic.

The ground realties, however, are going to form a drag on the oil prices in the foreseeable future: all major European economies are in the doldrums with the dreaded R-word hardly losing its presence or the frequency, when it comes to daily financial analyses by the pundits; inflation is rising and in inverse proportion, people lose their spending power over endless anxieties; interest rates are on the rise and state interventions are contemplated to dealing with impending mortgage crises.

The cumulative impact leads to what the analysts in the commodity realm call, a demand destruction; it does exist and is more than being just merely psychological.

In another interesting development, although widely known already, the Indian media says that Russia accounts for more than 46% of the Indian oil imports, a rise in 44% in a year after the invasion of Ukraine by  Russia - from mere 2% before February, 2022. Up until then, India mainly purchased the commodity from the Middle East, the US and Africa. 

The US that considers India as a strategic partner may not be happy with the latter on account of propping up the Russian economy. 

There are no signs of India turning its back on cheap Russian oil, though - as yet: it is simple economics: when Indian refiners  can snap up oil just above $68 a barrel while the Saudis sell the same above $86 a barrel, the choice cannot be clearer. 

The insatiable appetite of the Indians to go for cheap Russian oil, however, is not without risks; they keep doing this at the expense of long term loyalties that did exist between the Middle Eastern producers and the world's third largest consumer of oil. 

If the war in Ukraine sees a peaceful ending at some point in the future, Russia will not be a source for cheap oil anymore and the Indians will be compelled to turn to the old suppliers as an inevitable consequence due to a myriad of logistical issues. 

According to the Indian analysts, this is a lingering anxiety among the Indian refiners that is not easy to dispose of.

As far as the existing economic realities are concerned,  the oil producers, especially those from the Middle East, can only pin their hopes on a dramatic improvement in the Chinese economy for the intended price reversal in order to enrich their coffers. 

At present, the only choice left for them is going for production cuts despite them not being the most constructive step - judging by the way markets reacted to them recently. 

All in all, as long as the flow of cheap Russian oil continues from the vast country with 11 different time zones through a sophisticated web of arteries, the dream of price hike though production cuts may remain where it belongs to  - the hypothetical realm.  


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