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China’s official manufacturing purchasing managers’ index rose in August, to 49.7 from 49.3. The increase is a positive sign even if the reading remains below the 50 threshold that separates growth from contraction.
The August reading means China’s PMI readings have now been in contraction territory for five months in a row, the Wall Street Journal reported.
In production, however, the August PMI reading was above 50, at 51.9. The service sector and construction subindex was also above 50, at 51, but that marked a monthly decline from 51.5.
The PMI indicator is one that commodity traders watch closely to gauge demand prospects. The signals these indicators sometimes give, however, differ significantly from more direct ones such as oil imports.
Over the five months that China’s PMI has been below 50, imports of crude oil have been running near record highs, suggesting resilient demand.
Over the first seven months of the year, imports of crude booked a 12.4% increase on the year to 122.4 million tons, the Chinese state statistics agency said this month.
At the same time, some analysts note that a lot of the imported oil has been put in storage, which might suggest the buying may slow down in the coming months, if weak economic indicators reflect weaker demand for energy, too.
"It seems that (China's recovery) is not going to happen," John Kilduff, partner at Again Capital, told Reuters earlier this month. "It's doubtful they're going to be buying. They bought a lot of crude for storage earlier in the year. They're sitting on a lot of crude."
Meanwhile, international prices have moved higher, which is not good news for an importer the size of China, so it began drawing on its stored oil recently. This also implies lower imports going forward.
On the other hand, if China’s PMI moves above 50, chances are that optimism about demand will return to oil markets unless bad PMI news from the U.S. prevents it from doing so.
By Charles Kennedy for Oilprice.com
Charles is a writer for Oilprice.com