Oil prices fell more than $3 recently as supply fears receded as recessionary concerns overshadowed the narrative. As I write this brief article, oil prices have risen again due to a larger than expected draw in the U.S. inventories. However, this is only temporary and the overall sentiment still remains bearish. Given the recent rise is Covid cases in the second largest economy in the world i.e. China, fall in retail sales and mobility still being on the lower side, I believe that oil prices will take further beating.
China has reported 28,000 new cases (domestically transmitted) on 21st November, 2022, which is almost near its peak in April. Measures such as lockdowns, isolating for days while entering the country, had investors worrying for the long term prospects of China’s economy that has already been facing serious issues especially in the real estate sector that contributes more than 30 percent to its GDP.
According to an estimate, areas that account for almost 20 percent of the country’s GDP is in lockdown posing serious threat regarding China’s growth. The Purchasing Manager’s Index (PMI) fell 0.9 percent to 49.2 percent and its oil imports declined for the first 3 quarters falling 4.3 percent YoY.
There was some “misplaced” optimism in terms of China reducing or easing its curbs. Simon Watkins explains this in a very insightful article for Oilprice.com.
Apart from these factors the mobility indexes in China are also not portraying a very positive picture. Compared to pre-pandemic levels the Highway Traffic Mobility Trend is considerably low.
Another indicator i.e. retail sales also show downward trend. According to the latest data by China’s National Bureau of Statistics (NBS) retail figures slowed down 0.5 percent in the month of October. Dining revenue also faced downward pressure falling 8.1 percent versus last October. JP Morgan has already reduced it GDP forecast to 2.7 percent from 3.4 percent. While the IMF has cut down China’s GDP forecast to 3.2 percent in 2022 versus 8.1 percent in 2021.
I will track these developments on the Market Sentiment Tracker 2022 - but the bearish side will come out heavier and signal a downward trend in the markets. The overall direction for oil prices remain in the bear territory.