China's Covid Crisis Will Ensure Oil Price Volatility

While fluctuating back and forth with fears of global recession and uncertain U.S. economic data, China’s economic reopening remains a significant key to demand determinations; yet, no one can get a handle on the severity of the country’s Covid crisis and what it might mean for future demand.

The problem, as we see it, is two-fold: First, there is no accurate data coming from Beijing. Second, while the media loves to actually blame the surge in new cases on the reopening–despite the fact that Western media likewise had harshly criticized Beijing for failing to reopen previously–logic dictates that the reopening itself was not the primary cause of the surge.

With regards to the data issue, oil traders cannot successfully evaluate future demand with any certainty because we have no idea what actual Covid numbers look like. Yes, we can look at manufacturing (PMI) data for an idea; however, that comes at the end of the month and gives us only what we already know based on demand for the same month. Getting out in front of it is difficult. China’s manufacturing activity declined for three months in a row as of the December data…

We have varying numbers to digest here. A UK-based health data firm says China has witnessed over 33 million new Covid cases from December 1st to December 20th (along with over 190,000 deaths). Western news agencies reported what was ostensibly data leaked from China’s National Health Commission indicating an even more alarming 250 million new cases in the first three weeks of December. Needless to say, there is a huge gap between 33 million and 250 million, and that gap would make a huge difference in manufacturing activity, directly affecting oil demand. By comparison, the CDC is registering nearly 471,000 new cases a week in the U.S. (from November 2022 to January 2023), and over 2,700 new deaths a week. That means the U.S. experienced about 1.2 million cases in the first 20 days of December, compared to China’s potential 33 million or possibly even 250 million in the same time period.

Those numbers are frightening, of course. However, it cannot now be blamed on the reopening itself, but rather, on the management of the zero-Covid policy prior to the reopening. Chinese citizens were essentially not allowed to develop any immunity, and any vaccinations they obtained prior to the severe lockdowns wore off, while the rest of the world was doubling immunity through a series of vaccines and boosters, along with infections themselves. With no immunity developed and vaccines wearing off, opening the doors could easily have re-ignited an epidemic.

So what happens now? Now, oil traders will wait once again for the Chinese epidemic Part 2, which will have to peak and then dissipate. No one knows how long that will be. It won’t be forever, but it won’t be over quickly, and it’s an impossible task to predict without accurate data. Until then, oil prices will necessarily remain volatile, with or without a Russian war on Ukraine and Western sanctions meddling in the mix.