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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Oil Markets Tremble As Chinese Stocks Crash

China’s stock market fell sharply on Thursday, dragged down by a range of concerns that should offer a warning to the broader global economy.

The Shanghai Composite Index fell nearly 3 percent on Thursday, falling to its lowest point in nearly four years. The problems in China are dragging down markets across Asia, including in Japan and South Korea.

The Shanghai Composite is now down more than 25 percent since the start of the year, and is down more than 10 percent in the last three weeks alone. Viewed another way, the Chinese stock market has lost more than $3 trillion in the last six months.

(Click to enlarge)

Shanghai Composite Index, last 12 months

The troubling thing about the recent declines is that the factors driving the losses are multiple. The trade war with the United States, mountains of debt held by local governments within China, a broader slowdown in growth, a weakening yuan and high oil prices are all creating headwinds for the Chinese economy.

China’s central bank said that it still has plenty of tools that it could use defend against the trade war. Looser reserve requirements took effect a few days ago, a move the central bank made to inject money into the economy.

The IMF says that China’s GDP growth could slow from 6.6 percent this year to just 6.2 percent in 2019, although the risks are skewed to the downside because of the trade war. The Fund said that a worst-case scenario in which the U.S. slaps stiff tariffs on nearly all imports from China would shave off 1.6 percentage points from Chinese growth.

China won’t see any relief from the U.S. Federal Reserve. Minutes of the Fed’s last meeting in late September were released on Wednesday, and they reveal a determination on the part of the central bank to continue to tighten interest rates. Related: Large Crude Build Forces Oil Prices Lower

The Trump administration offered a very modest bit of relief this past week when it decided to hold its fire in its latest report on foreign-exchange policies. The Treasury Department maintained that China was a source of “particular concern,” and that China’s “lack of currency transparency and the recent weakness in its currency” would continue to pose “major challenges in achieving a fairer and more balance trade,” but the department refrained from using the “currency manipulator” designation. The move was widely expected, but it also shows a bit of restraint from the Trump administration, deciding not to go all-out in its economic battle against China.

But that is belied by the trade war that Trump is waging against China, which could still escalate in the coming months to new levels. Tariffs on $200 billion of Chinese imports will jump from 10 percent to 25 percent at the beginning of 2019. Trump is also weighing tariffs on an additional $267 billion of Chinese goods.

The campaign is taking a toll. “Current indicators of Chinese economic activity are weakening,” the International Energy Agency said in its recent Oil Market Report. “China’s Caixin Manufacturing PMI fell to a 16 month low of 50 in September: the output component pointed to slower growth, new orders remained unchanged and exports fell the most since early 2016.” Related: Saudi Arabia Calls The End Of Russia’s Oil Prowess

The cracks in the Chinese economy are a headwind for the oil market. China’s gasoline demand was up 180,000 bpd year-on-year in China in August, but that came after a second quarter in which demand was lower than a year earlier. Car sales in July and August actually declined compared to the same period in 2017. The IEA laid out the numbers: “Total vehicle sales declined to 1.59 million in July, a 15.2% m-o-m decline and a 5.3% y-o-y decline. Vehicle sales reached 2.103 million units in August, down 3.8% y-o-y. Passenger car sales, in particular, dropped by 4.5%.”

For now, though, the impact on oil demand remains unclear. The IEA still thinks that total oil demand in China will rise by 525,000 bpd in 2018, a 4.2 percent increase compared to last year. That will slow, but not overly so, to 465,000 bpd in 2019.

In other words, as it currently stands, China still represents a major source of demand growth. China and India together account for 60 percent of total global oil demand growth. The cracks in the Chinese economy will translate into a deceleration in demand growth, but it will take a stronger slowdown to really put a major dent in consumption levels. The thing is, for China, and for the oil market, a more serious downturn cannot be ruled out.

By Nick Cunningham for Oilprice.com

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  • Dan on October 19 2018 said:
    Amazon. If Amazon falls there is a Chinese slowdown in oil consumption. If Amazon sales set another record oil consumption will grow in China. Plus, China is opening up more markets, though small but numerous, through Silk Road development. What consumer items, non food, can you buy not made in China? Millennial s number one pick for investing is Amazon because they are deeply entrenched into the one click.
  • EHLipton on October 19 2018 said:
    Nick, I think from here on out I am going to do a more serious search before clicking on to anymore articles on oilprice.com for your name cause your so all over the place with your analysis your like having had a bad meal and then having to relieve one's self. You dirty up the commode. One day we have a over abundance at Cushing's, 2 hrs later the report is wrong,,so you state, do too whatever reason YOU INVENT! YOUR so full of tar you should be a roofer!
  • Mamdouh G Salameh on October 19 2018 said:
    Still, China’s economy is projected to grow this year by 6.6%, double that of the United States’ and phenomenal for a mature economy like China’s. Even a projected 6.2% growth next year is a very respectable growth.

    The other pivotal indicator is that total oil demand in China will rise this year to 13.32 million barrels a day (mbd), an increase of 525,000 barrels a day (b/d) or a 4.2% increase over last year necessitating oil imports exceeding 10 mbd. It is also projected to rise by 3.5% or 465,000 b/d in 2019 to 13.79 mbd.

    China will continue for the foreseeable future to be the major driver of both global economic growth and global oil demand. China and India together account for 60% of total global oil demand growth.

    The escalating trade war between the US and China is destabilizing the global economy by creating uncertainty in the markets. Long term, the trade war will harm the United States' economy far more than China's
    .
    If China was hindered by rising US tariffs from selling $800-billion worth of goods annually in the US, it can sell them somewhere else as its economy is far more integrated than the US economy in the global trade system supported by its silk and belt road initiative.

    The US on the other hand may have to replace Chinese imports with more expensive imports from elsewhere. This will lead to rising costs for US customers, higher inflation, widening budget deficit and rising outstanding debts by at least 2.35%. In other words, the US will be the eventual loser in a full trade war with China.

    However, there is a glimmer of hope that the meeting in November between President Trump and Chinese President Xi Jingping could lead to breakthrough ending the escalating trade war between their countries.

    The first crack in the US armour has appeared when the US Treasury concluded that China has not been manipulating its currency to benefit from trade with the United States. This is one of two accusations President Trump used when he imposed tariffs on Chinese exports. The other is the huge trade surplus China enjoys with the US.

    It is, therefore, no coincidence that the Trump/Jingping meeting comes at the time US sanctions against Iran go into effect. If no breakthrough is reached then, the trade war between them could be expected to escalate further. China could nullify US sanctions altogether by importing the total Iranian oil exports amounting to 2.2 mbd and paying for them in petro-yuan. Moreover, the petro-yuan has made the US sanctions useless and has provided a way by which Iran could bypass the petrodollar and the sanctions altogether.

    I have repeatedly argued that sooner or later President Trump will realize the futility of his escalating trade war against China. It is a war he can’t win. He will eventually be forced to cut his losses by bringing to an end his trade war with China.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Tony on October 19 2018 said:
    There is a common misconception as talking points that in order for China to offset the difference of rising US tariffs on $800 billion of goods, China has to regain their surplus by dumping their products into other markets. Several things need to happen in other parts of the world in order for the Chinese to sell the difference 'somewhere else'. One of the following would have to happen.

    1. The population in other parts of the world would have to increase by 325 million, the population of the US) relatively quickly.

    2. The other markets would have to increase their annual income, purchase more from China than they do now, and willing take trade deficit against China. For example, China would have to make a case for other markets to buy two screwdrivers instead of one. But what if they only need one screwdriver? Perhaps the Chinese can convince them to buy three screwdrivers for the price of two?

    3. Developing countries along OBOR would have to be developed exceptionally fast like be fully developed in less than 10 years where its population has any worthwhile earning power to buy Made in China which is extremely unlikely to happen because if that time comes, these countries will have their own protectionist policies to protect their own economy. For now, countries of early OBOR projects are having trouble paying their debt.

    LNG is a global commodity that is as essential as oil or soybean. These are globally traded commodities essential to all countries. A producer won’t produce more simply because China needs it. They will take advantage of the opportunity to sell at inflated cost and not produce in excess in order to keep prices up. If South American soy producers are short in supply, it may be cheaper to buy from North America to replenish their supplies than to produce for locally. Commodities and their prices will simply reshuffle and their prices will eventually meet global equilibrium where they can make a profit and cover well over their operating costs. Currently, China is paying more for South American soybeans at an average of an additional $2 per bushel plus more shipping cost while the US is shipping to South America cheaper per bushel but saving on cheaper shipping cost.

    Most of Chinese exports into the US are non-essential items that can still be made cheaply in trade friendly countries. It can get its electronics from Japan or South Korea and its clothes from Southeast Asian countries. If cheap manufacturing is necessary, there are plenty of places outside China to make them. The Chinese do not a monopoly on cheap manufacturing. The last few Intel processors I purchased are made in Malaysia and Vietnam. The memory modules made in Taiwan but the motherboard was made in China. There is no reason why any of the other listed countries cannot produce the remaining components for the US.

    Under Trump, we are currently witnessing the mass migration of the Chinese supply chain to more parts of the world for non-essential goods. Trump is very well on the way to winning the trade war that even Obama is taking credit for it. That says a lot. Meanwhile, the US economy is currently running on all cylinders. It is running so exceptionally well that Obama is currently campaigning for his Party calling it an 'economic miracle' creating over 200,000 jobs per month since Trump's inauguration. Obama is telling us to 'HOLD UP' reminding us that this economic miracle is an 'Obama economy' lest we make the mistake that Trump's tax overhaul, skyrocketing DOW and NASDAQ, and the trade war with China had anything to do with it.

    Trump does not expect China to back down. I'm sure by the time the trade war reaches the apex, all tariffs in place up to that point will remain in full force, and remain there where the mass exodus of investment and global supply chains move away from China is near completion. China expects Made in China 2025 to come to fruition based on the status quo pre-Trump. China does not have a clear path to Made in China 2025 without the critical requirement of IP theft or transfers. With 800 million Chinese making less than $5 a day wanting to enter the middle-class, it is critical that Xi Jingping understands that he needs to get into good trade terms with the US and stopping the IP theft is all that Trump expects. It is not an unreasonable demand.

    The Chinese and US stock market performance chart over the past year is reflective of who is losing and winning the trade war.
  • Enki on October 21 2018 said:
    We hear about Chinese economic collapse for 20 years, yet nothing happened yet....
  • John Brown on October 23 2018 said:
    China continues to steal trillions in intellectual and technological property from the USA as well as wage unfair trade to give themselves a massive surplus that they are using to build their military to militarize the South China Sea and behave in an aggressive and hegemonic manner. They think they own the international waters of the S China Sea.
    If China continues down that path then Trump will have to put huge Tariffs on all Chinese products coming into this country. We can make iPhones in Vietnam, Indonesia, India, Philippines etc. We should help make our friends rich and let China take care of itself if it wants to play the stealing, cheating, world domination game. Hopefully they will come to their senses. As Trump has proven he's willing to come to a fair deal. But he's not a weak, worthless, appeaser like Obama. China has to be willing to make a fair deal and wind down the aggression.

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