Oil prices enter the week trying to regain a little composure after concerted US-led air strikes switched from targets in Syria and Iraq to those of Houthi aggressor sites in Yemen over the weekend. Yet the spectre of a Gaza ceasefire remains prevalent in the minds of oil watchers which can be exampled by the passage of the major futures contracts last week. Admittedly, some of the fall is exaggerated due to the backwardated nature of Brent and Heating Oil at expiry, nonetheless history does not recognise such intricacies other than the dramatic falls across the complex which saw the M1 highs of last Monday evaporate to the settlements of Friday in this order; WTI -$7.01/barrel, Brent -$7.47/barrel, Heating Oil -23.23c/gal, RBOB -16.95c/gal and Gasoil -$63.25/tonne. Using the measure of falls from the highs is open to a charge of being arbitrary, but they are monthly and year-to-date highs and thus important.

Eventually adding to the oil price demise was a real sea-change in what might occur in interest rates, 'eventually', because US bourses led subservient global equities higher yet again on AI inspired results from big ticketers such as Amazon, META and their ilk, but the idea of a near-to-date interest rate pivot started to erode with hawkish noises from the ECB, was given a further cautionary gouge by Jerome Powell's after-FED speech and all but undermined with the stellar non-farm payrolls from the US on Friday. It is worth noting that in an interview with the US TV channel CBS's '60 Minutes' and aired last night, the Fed chair offered, in paraphrase, that this should be a time of prudence and the data should play out. The non-farm payrolls saw an increase in 350k positions as opposed to the 180k forecast and such data makes Powell's call for 'prudence' justified and why equities open the week backfooted for a change, hurried lower by all that is China including a slowing of the Caixin Services PMI and the blue-chip CSI300 index registering 5-year lows again.
 

A court decision and the IMF put paid to China stimulus hopes

It has been our view for a while that China, the mighty economic powerhouse of Asia, while not a spent force, will no longer be able to be the reliable sinkhole for all the oils of the world when other destinations are sated. Without delving into all the woes that have beset its economy since the ending of the self-harming zero-COVID policy, our attention was turned to some striking events that while seemingly separate blows to the idea of oil demand, they are linked to not only the current influence that China bears on the demand picture of commodities, but in the years to come.

Extension after extension and a seeming free pass from the government appeared to offer Evergrande, China’s giant property developer, a continuing shield against the rigours and scrutiny of what might be expected in a failing financial institution, or at least the outcome of a builder in such an elongated property rout as the company has been in something of a liquidity crisis since 2021. Last Monday, and according to Reuters, the judge presiding over a winding-up lawsuit that had befallen many adjournments said, “enough is enough” after Evergrande’s so-called restructuring plan was dismissed and ordered the company be put in the hands of a liquidator.

The total amount of debt is estimated at over $300 billion, however, what will see continued reverberations within investment to China be it offshore or on, is the rate of recovery which if resounds with contemporary thinking will leave a financial maw. In July 2023, Evergrande referenced a Deloitte estimate of 3.4%, but according to Reuters, S&P Global Ratings offshore default cases of Chinese developers typically returned 2.8% and onshore for similar defaults being 8.3%. The Financial Times estimates 1.5 million homebuyers have already paid the developer, equivalent to $90 billion, for unfinished homes. This liquidation order made in Hong Kong has yet to be recognised on the mainland, which for the most part has also been very measured recently in stimulus. There can be little doubt that a bailing out of people with homes paid for but yet to be constructed, will hinder what monies might have been budgeted elsewhere in industry/economy and what happens if the likely failure of Evergrande spreads to other developers? Negative equity is already upon many of China’s folk, and with personal bail-out plans likely to take some time to implement, the average spending from individuals will retreat, activity will shrink and with it, oil demand.

If that were not gloomy enough, an almost coup de grace for a prostrate China outlook was delivered by the International Monetary Fund (IMF) outlook for China. Starting with the good news first, and there is not much of it, China’s 2023 economic growth goal was achieved at 5% but after that it is all bad. The micro scrutiny of Evergrande above is taken up in a grander condemnation of the property sector as it (IMF) notes large imbalances of overinvestment in infrastructure and housing. There contained various and continued references to the property sector, but the warnings were not just left to the remit of housing; listing weaker demand for China’s exports, issues of productivity, and ageing population and fiscal indebtedness of local authorities, the outlook, even for the IMF’s usual ‘glass half-empty scribblings’ was a sullen and sobering read.

What really shows bearish teeth for oil in the medium and long-term is the prediction of the growth to fall to 4.6% in 2024 and strikingly shrink from an estimated 5.4% last year in real gross domestic product growth to 3.4% in 2028. The current bubble of China’s stellar period of growth appears to be finding many signposts to something of hiatus. It is ridiculous to suggest that it is all over for the Asian Dragon, but the endemic reality as suggested in just two news stories of last week is enough to suggest the perma-bid that we have been accustomed to from South-East Asia will not be as strong as it has been for some time.
 

Overnight Pricing

john.evans@pvm.co.uk

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