Oil prices go about their business of unwinding some of the war premium that has been priced-in due to the continuing tensions surrounding the Gaza conflict and the subsequent Iranian missile onslaught on Israel. It is hard to imagine that ‘cooler heads prevail’ can be associated with this eons-long strife, but thus far Israel has adhered to the international calls of showing restraint. While it does so, the fear-fog of conflict spread that occludes all other drives starts to lift, and when compared with the fortunes of the wider suite, oil seems inflated and proceeds to correct. Where the vulnerability is most stark is how the open interest last week in Brent increased along with net-longs as did the bullish pricing of options. The rolling period of funds held no sway for dug-in bulls, but a quieter geopolitical front, a setback in interest rate cut hopes and with only one week to go before Brent enters the ‘limiter’ period, the burgeoning length might be the biggest influence. In explanation, the limiter period for Brent allows 6,000 lots of open positions during the 5 days preceding expiry, unless an exemption is granted. Therefore, between now and then some of this length will have to either roll forward or flatten, bringing at the very least some pressure to the front part of the curve.

Dragging on everything is the continued inability for the US Federal Reserve to qualify in its own criteria for a cut in interest rates. There is no confidence that a current path to the hallowed 2% inflation is being walked. The US economy remains relatively hot as labour markets are strong along with retail sales, and when added to gasoline prices and housing costs, there is little wonder that yesterday Jerome Powell, the Fed Chair, backed off from any signals of a cut in interest rates. He pointed out that greater confidence was needed from the restrictive monetary policy which would be allowed to further time to work while evolving data would be continually scrutinised. The standard reaction played out in investment markets as yields rose along with US Dollar and equities have endured a very negative week with the three main US bourses losing 2% in five days. This has been exacerbated with book squaring in front of a slew of quarterly results, but risk-off by such a margin is hardly beneficial to oil prices, that outside of the geopolitical influence and positioning described above, finds another dampening factor in an API build of 4.1mbpd in crude stocks.

A change in the fortunes of China? Maybe.

It does make something of a change to see an economic marker from China that does not immediately wonder if the Asian giant will ever be what it once was. This refers to the year-on-year 1Q24 GDP reading that was forecast to come in at 5% but beat the call and registered 5.3%. It was clear at the National People’s Congress (NPC) last month that there would be a deliberate move to bolster manufacturing and particularly those associated with new technologies such as electric vehicles and even space travel. What was mightily apparent is the need to keep away from the negative attention being borne by the faltering property market that has imbued the economy with domestic consumer restraint. Government support and concentration on exports have aided the GDP cause enormously, but much to the chagrin of many countries around the world who suffer at the hands of cheap China goods. The WSJ has that exports in the first quarter rose 1.5% compared with the same period a year earlier when measured in U.S. dollar terms, though by more than 4% by volume as prices for Chinese goods fell on global markets.

What is worrying and shown within the GDP is that the debt ratio is now 293.2%, a new quarterly high. According to Bloomberg data, the debt ratio is spread across the many sectors of measurement. But household, non-financial corporations and government areas were markedly higher than in 4Q23, which is laid bare when compared with the 1Q23 total debt ratio of 279.7%. This then is the price being paid for the NPC’s plan to manufacture and export China’s way out of the months of economic gloom following the end to the zero-COVID era. Such debt is tolerable because of the PBoC’s current level of low interest rates with the 1-year and 5-year Loan Prime Rates at 3.45% and 3.95% respectively. This path will continually narrow in tolerance, because of the insistent manner in which the PBoC fixes the Yuan every day at high levels against the US Dollar which continues on its tear because of the FED’s own battle with interest rates.

Stimulus and success in one area do not always equate to others. Industrial Production year-on-year in March came in at 4.5%, much lower than the 5.4% forecast with an even worse performance in Retail Sales of 3.1% against 4.5% call. What is ignored in all the fuss over the GDP reading is the numbing number that is the House Price Index. Its year-on-year March reading of -2.2% is even worse than the previous -1.4% and will be the major factor in why domestic readings remain so poor. Also coming as a candid surprise is the recognition of the continuing problem of rising youth unemployment. Having stopped publishing this emotive indicator last year, National Bureau of Statistics (NBS), pre-empting the new measure that will come to press in the next few days, informed wires that it has increased slightly and “requires a high degree of attention”, according to Bloomberg.

Oil prices generally like improving GDP numbers. An economy’s health is associated with this macro measure, particularly from an oil-sensitive nation such as China. What has also caused oil prices to be a little China-happy, even though crude imports were off 6.23%, is data form NBS that oil refining is on the increase. Run rates for March were 1.3% higher year-on-year, and according to Reuters, the barrel equivalent of 15.09mbpd, up from 14.45mbpd in the first two months of this year. Caution can obviously be found in the micro measures, the state of the property market and how it impedes with individual domestic economic data markers, but with the stimulus employed as promised by the NPC, bulls will be hoping that this might just be the corner-turning signal that has been speculated and hoped on for over a year.

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