While all eyes are temporarily on the Federal Reserve’s rate hike plans and a virtual meeting of OPEC+ ministers–both on Wednesday–Chinese factory data will also weigh heavily on oil prices, and is exactly what OPEC+ will be watching.
While COVID-19 continues to wreak havoc on Chinese production in the wake of the removal of restrictions related to Beijing’s zero-COVID policy, Asian sources say that January’s manufacturing activity should see a decelerated slowdown, even if it will not yet hit expansion territory.
According to a Reuters poll, the forecast for January factory output is a slower contraction than the previous month, despite the pandemic’s negative impact on production lines.
The Reuters poll expects China’s PMI (the manufacturing purchasing managers’ index) to hit 49.8 in January, up from 47.0 in December.
A separate PMI for private industry, the Caixin manufacturing PMI, is expected to report a PMI of 49.5, up from 49.0 in December, according to a Reuters poll.
The 50-point mark in the index separates contraction from growth, with readings below 50 indicating a contraction in activity. In December, Chinese manufacturing activity dropped for a third consecutive month and the drop was the steepest since the onset of the pandemic in February 2020.
China’s official PMI data will be released on February 1st, one day before the OPEC+ virtual meeting.
What OPEC+ is monitoring closely is how COVID infections are affecting China’s workforce and factory closures, and how, in turn, this will impact oil demand. Of significant concern has been dire numbers showing that 80% of the country’s population had been infected just prior to China’s Lunar New Year festivities.
Now, however, there are signs that the situation could turn around.
“Early signs suggest that conditions improved in January,” according to a note from Capital Economics, cited by AsiaFinancial.
“...Any lingering supply-side issues will matter less at a time of year when factories wind down production in any case,” the note continued, concluding with a forecast of 50.0 PMI.
While Chinese demand is a major consideration for oil prices, analysts continue to scramble to get a handle on the direction, with potentially inaccurate data coming out of China. While PMI predictions are promising, fears of a global recession are still weighing on outlooks and Beijing is struggling to reverse shrinking manufacturing with policies to help boost consumption.
By Charles Kennedy for Oilprice.com
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Charles is a writer for Oilprice.com