China’s Slowing Economic Growth Could Wreak Havoc On Oil Markets

By Tim Daiss

Beijing

Despite renewed hopes that a fresh trade deal could be reached between the U.S. and China by the two sides’ self-imposed March 2 deadline, it may still not be enough to offset the negative impact on China’s economic growth already being felt. Sources told Reuters last week that Beijing is planning to lower its economic growth target to 6 percent,

The analysis comes as China saw its exports fall unexpectedly in December by 4.4 percent, the most in two years, with imports also falling 7.6 percent in their biggest decline since July 2016. Since exports fell in December, in spite of government efforts to boost growth (including higher infrastructure spending and tax cuts), exports could also falter for several months going forward as domestic growth slows. Ratings agency Moody’s also said in a note that “producers price inflation had decelerated for six consecutive months,” adding to other signs of cooling industrial activity (in China) amid weakening global demand.

Largest trade surplus in a decade

At the same time as China released its December export data, the country also said that its trade surplus with the U.S. in 2018 grew by 17 percent to a staggering $323.32 billion, a figure likely to put more pressure on Beijing during ongoing trade talks with the U.S. Exports to the U.S. rose 11.3 percent on-year in 2018, while imports from the U.S. to China rose 0.7 percent over the same period.

Perhaps, even more troubling for the U.S. as it continues to pressure China over a host of trade and intellectual property rights problems is that even though China’s trade surplus with the U.S. spiked last year, it’s overall trade surplus actually dropped to its lowest since 2013- indicating serious and ongoing systemic trade relationship issues with the U.S. These numbers should give even more leverage to U.S negotiators s they hammer out a trade deal with their Chinese counterparts.

A CNBC report said that beyond the tariffs battle with the U.S., China’s economy has been facing its own domestic headwinds. Even before Trump kicked off the latest escalation in trade tensions, CNBC said, Beijing was already trying to manage a slowdown in its economy after decades of breakneck growth.

Headwinds for global oil markets

China’s recent export data forecast that the worse may be just around the corner could still weigh heavily on global oil markets, despite oil prices recently recouping much of the ground it lost from mid-October to the end of last year.

On Monday, oil prices fell by nearly 1 percent, with global oil benchmark, London-traded Brent crude futures dipping below the psychologically important $60/barrel price point. U.S. oil benchmark, NYMEX-traded West Texas Intermediate (WTI) crude futures were down around 0.9 percent at $51.12/barrel. Some analysts, citing the recent data coming out of China, are forecasting that the upside for oil prices will be in the mid-$60s/ barrel range for Brent and around $55/barrel for WTI. However, it’s expected that China’s growth could stall in the first half of the year, the bigger factor for both China’s growth and global oil markets hinges on the outcome of ongoing trade talks between Washington and Beijing.

If some sort of deal can be reached to not only eliminate the risk of President Trump raising current tariffs on $200 billion of Chinese good from 10 percent to 25 percent as well as placing another $267 billion worth of Chinese goods under tariffs, global economic growth will tick upward, including in emerging markets, with a knock-on effect on increasing oil demand, which will support higher oil prices. However, in a worst-case scenario, where a trade deal can’t be reached or, the outcome for global economic growth and oil demand will be a bearish oil market that will also see pain for oil producers all the way from Saudi Arabia to Russia, to Canada, to the U.S. and back again.

By Tim Daiss for Oilprice.com

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