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Oil (WTI-Aug Exp) made a low around 86.86 in early U.S. sessions Monday on the concern of a synchronized global recession after China reported subdued economic data. Oil almost fall to near the 6-month low of 86.55 scaled in Feb’22 on the concern of lower demand and higher supplies amid the probability of an imminent Iran nuclear deal coupled with higher Saudi output, which may pave the way for around +3 mbpd additional supply in the global market.
The increasingly worse global economic outlook added to OPEC’s expectations of a decline in oil demand and supply increases, which challenged contrary views from the IEA citing gas-to-oil switching for power generation. In the meantime, hopes of more supplies from Iran emerged after the state-run IRNA said that it could accept the EU’s offer to revive the Iranian nuclear deal.
Elsewhere, Saudi Aramco head Amin Nasser said Sunday that the state-owned firm stands ready to raise crude output to its maximum capacity of 12 mbpd if the Saudi Arabian government orders it to do so: "We are confident of our ability to ramp up to 12 mbpd any time there is a need or a call from the government or from the ministry of energy to increase our production”.
On early Asian Sessions Monday, China, the world’s 2nd largest economy and oil consumer, reported a dismal set of economic data showing slower-than-expected retail sales growth, a disappointing pace of industrial production, and softer-than-forecast government investment and most drop in home prices in almost 7-years. The anticipated economic slowdown amid technical recession in Europe and the U.S. coupled with China’s zero COVID policies (recurring lockdowns) prompted China's central bank, the People's Bank of China (PBOC), has lowered the Medium Lending Facility (MLF) 1Y policy rate to 2.75% from 2.85% and the 7D reverse repo rate to 2% from 2.1%. This is the first cut since January, An unexpected move that indicates the re-emergence of China's downward economic cycle. The market is now expecting PBOC to cut the Loan Prime Rate (LPR) for 1Y to 3.6% from 3.7%, and for 5Y to 4.30% from 4.45%.
The Chinese economy's downward cycle is not just coming from lower demand for home sales and fewer home-building activities. It is due to a broad-based slowing in consumer spending (retail sales), industrial production, and government/private fixed-asset investments.
Chinese new home sales dropped mostly in around 7 years:
On Monday, Chinese data shows average new home prices in China's 70 major cities dropped by -0.9% in July, following a -0.5% decline in June (y/y). It was the third straight month of decrease in new home prices, and the steepest fall since September 2015, amid COVID outbreaks in some cities and a downturn in the property sector.
On a sequential (m/m) basis, new home prices were flat for the second straight month, as already fragile sentiment was further corroded by a mortgage boycott by homebuyers upset by unfinished projects despite continued targeted stimulus measures by the Chinese government.
China’s Industrial Output Grows Less than Expected:
China's industrial production grew by +3.8% in July, was below market expectations of +4.6%, and after a 3.9% rise in June (y/y). It is the third straight month of growth below 4% in industrial output, and much below pre-COVID levels of around +8%, pointing to a fragile economic recovery due to recurring COVID restrictions. Industrial production grew slower mainly from weaker growth in materials for home-building activities. Semiconductor production also tumbled which confirms that the industry is entering a downward cycle as global demand for smart devices is going to be lower than in previous years. This makes up a big part of exports not only for Mainland China but also for other Asian economies. Textiles contracted, which could reflect not only weak domestic demand but also high inflation which is affecting export demand.
China’s Fixed Asset Investment Rises Less than Estimated:
China's fixed-asset investment grew by +5.7% to CNY 32.0 trillion in the first seven months of the year, compared with market forecasts of +6.2% and following a +6.1 percent growth in the first six months of the year. The weakness was mainly from the slow growth in private capex, which only grew 2.7% (y/y), compared to state-owned enterprise (SOE) capex of 9.6% (y/y). The bright spot was electrical machinery and equipment manufacturing, which should form part of state investments for infrastructure projects.
China’s Retail Sales Growth Below Estimates:
China's retail trade rose by +2.7% in July, which was below market estimates of 5% and after a 3.1% growth in June. While marking the second straight month of increase in retail sales, the latest print highlighted a shaky recovery of the Chinese economy as Beijing shows no sign of easing its zero-COVID policy. Considering the first seven months of the year, retail sales were down 0.2%, reflecting the impact of tough mobility restrictions in several major cities from March to May. Moreover, clothing sales – grew at a mere +0.8% in July (y/y). This is lower than the headline, which indicates that the general public is spending only a little more than last year.
China’s Jobless Rate Lowest in 6 Months:
China's urban unemployment inched down to 5.4% in July from 5.5% in June. It was the lowest jobless rate since January, amid continued efforts by the government to revive the momentum of economic recovery by further loosening of COVID-restrictions. For this year, the government has targeted the jobless rate to stay around 5.5%. Considering the first seven months of the year, 7.83 million new jobs were created across China, which has set a target of creating over 11 million new urban jobs for 2022 after adding 12.69 million a year earlier.
China’s core inflation increased by +0.8% in July from +1.0% in June (y/y), while headline inflation (CPI) was around +2.7% in July against +2.5% in June and the fastest rise in the last two years. In any way, both core CPI and headline CPI are still below the current PBOC target of +3.0%, while economic (GDP) growth is substantially below the target. This may pave the way for more targeted monetary and fiscal stimulus.
The Chinese economy grew only +0.4% in Q2CY22, much below the market consensus of 1.0% and slowing sharply from a 4.8% growth in Q1CY22. The latest figure was the softest pace of expansion since a contraction in Q1 2020 when the initial coronavirus outbreak emerged in Wuhan. China's statistics agency (NBS) described the GDP growth for Q1 as “hard-earned achievements” and warned about the lingering impact of outbreaks and “shrinking demand” at home.
The NBS also noted the rising risk of stagflation in the global economy and tightening monetary policy overseas. For the first half of the year, the Chinese economy grew by 2.5%. China has targeted the country's GDP to grow around 5.5% this year, after an 8.1% expansion in 2021 which was the steepest pace in nearly a decade, and following a 2.2% growth in 2020. Meantime, activity data for June showed some improvement, as the Chinese government has rolled out a raft of measures (fiscal stimulus), cutting taxes for businesses and channeling more money into infrastructure projects.
The Chinese real GDP increased to 525197.30 CNY HML in Q2CY22 from 256322.10 CNY HML in Q1CY22.
Export heavy around $18T Chinese economy is now slowing due to the synchronized economic slowdown in the U.S. and Europe and some domestic issues like real estate slowdown, lingering COVID disruption (under zero COVID policy), tumbling birth rate (increasingly unfavorable demography) and also higher labor costs (as China now almost a developed economy rather than developing). But even at a slower rate, China is set to overcome around $20T U.S. economy in the next few years to become the world’s largest economy.
On Monday, China’s NBS said: National Economy Sustained the Momentum of Recovery in July
“In July, faced with the increasingly complicated and challenging international environment as well as frequent and sporadic domestic outbreaks of Covid-19 pandemic, under the strong leadership of the Central Committee of the Communist Party of China (CPC) with Comrade Xi Jinping at its core, all regions and departments adhered to the general principle of pursuing progress while maintaining stability, conscientiously implemented the decisions and arrangements made by the CPC Central Committee and the State Council, effectively coordinated the Covid-19 prevention and control and the economic and social development, and carried out a package of policies and measures to stabilize the economy. As a result, production and supply continued to recover, employment and prices were generally stable, foreign trade maintained the good momentum of growth, and people’s livelihood was strongly and effectively safeguarded. The national economy sustained the momentum of recovery.”
Overall, China is now pursuing sustainable stable economic growth amid an adverse global geopolitical environment, synchronized stagflation on both sides of the Atlantic (U.S.-Europe), faster monetary policy tightening and lingering COVID disruptions in the country. China is taking care of both lives and livelihoods. China and Russia also know lingering supply chain disruptions and subsequent inflation will destabilize the Western economy including the U.S. Thus, China may be in no hurry to come out of the zero COVID policy, even if it may cause some economic slowdown back home.
On 3rd August, OPEC+ pledges to increase September output by 0.1 mbpd after pledging more than +0.6 mbpd in July and August. OPEC said:
“The Meeting noted the dynamic and rapidly evolving oil market fundamentals, necessitating continuous assessment of market conditions.
The Meeting noted that the severely limited availability of excess capacity necessitates utilizing it with great caution in response to severe supply disruptions.
The Meeting noted that chronic underinvestment in the oil sector has reduced excess capacities along the value chain (upstream/midstream/downstream).
The Meeting highlighted with particular concern that insufficient investment into the upstream sector will impact the availability of adequate supply in a timely manner to meet growing demand beyond 2023 from non-participating non-OPEC oil-producing countries, some OPEC Member Countries, and participating non-OPEC oil-producing countries.
It noted that preliminary data for OECD commercial oil stocks level stood at 2,712 mb in June 2022, which was 163 mb lower than the same time last year, and 236 mb below the 2015-2019 average, and that emergency oil stocks have reached their lowest levels in more than 30 years.
The Meeting also noted that Declaration of Cooperation conformity has averaged 130% since May 2020, supported by voluntary contributions of some participating countries.
Emphasizing the value and importance of maintaining consensus as essential to the cohesion of OPEC and participating non-OPEC oil-producing countries, and in view of the latest oil market fundamentals, the Participating Countries decided to:
Reaffirm the decision of the 10th OPEC and non-OPEC Ministerial Meeting on 12 April 2020 and further endorsed in subsequent meetings including the 19th OPEC and non-OPEC Ministerial Meeting on the 18 July 2021.
Adjust upward the production level for OPEC and non-OPEC Participating Countries by 0.1 mb/d for the month of September 2022 as per the attached table. This adjustment does not affect the baselines decided on the above-mentioned Meeting on 18 July 2021.
Reiterate the critical importance of adhering to full conformity and to the compensation mechanism. Compensation plans should be submitted in accordance with the statement of the 15th OPEC and non-OPEC Ministerial Meeting.
Hold the 32nd OPEC and non-OPEC Ministerial Meeting on 5 September 2022.
As per OPEC MOR-August report/estimate, global oil and other liquids (NGL) demand may be around 100.02 mbpd on average in 2022 vs 96.92 mbpd in 2021 against a supply of 94.38 mbpd and 90.08 mbpd. This leaves a supply-demand balance of -5.64 mbpd in 2022 vs -6.84 mbpd in 2021. Now assuming higher Saudi Arabian supply by around +2 mbps and Iran (after the nuclear deal) by around +1 mbpd and nominal output increase by other OPEC producers (as per their feasible capacity), estimated global oil/NGL demand may be around 100.18 mbpd in 2023 against projected demand 102.72 mbpd, which leaves a balance of around -2.54 mbpd (supply-demand). Now the question is whether there would be around +3% annual growth in oil demand if there is a synchronized global recession amid lingering geopolitical tensions, economic sanctions, higher inflation and faster central bank tightening.
After more than 2 years of coordinated production cuts, OPEC+ has reached the point when it no longer must increase production targets and needs to rethink the future of the 18-member oil cartel. With Russia facing a series of sanctions from 2023 onwards and thus susceptible to production drops, Saudi Arabia is seeking to keep OPEC+ as the oil market’s coordination force, preferring to avoid sudden market shocks as Riyadh has finally grown to enjoy a protracted windfall period. Haitham al-Ghais, OPEC’s new secretary general, stated Russia’s participation in OPEC+ is vital for the success of the agreement, claiming that the cartel does not control oil prices but fine tunes the market in terms of supply and demand.
On late Monday, oil recovered to around 89.50 as the market turned skeptical of Iran-U.S. nuclear deal and Saudi Arabia’s willingness to pump additional 2 mbpd oil in the coming days.
International Energy Agency (IEA) sees soaring global prices for natural gas amid the Russia-Ukraine war could prompt more energy consumers to switch to oil for year-end heating purposes, which may support the black gold (oil) in the coming days. Looking ahead, whatever may be the narrative, technically oil now has to sustain over 85 for any meaningful recovery towards 115-130; otherwise, expect 60 levels in the coming days.
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