Story By Andreas Exarheas |RigZone.com| Brent crude futures are in correction mode due to the uncertainty surrounding China’s economic outlook and stimulus package.
That was stated in a Rystad Energy oil market update from Mukesh Sahdev, Rystad Energy Global Head of Commodity Markets—Oil, sent to Rigzone on Monday.
“A news conference on Saturday by China’s Finance Ministry signaled a strong revival of the struggling economy, with support for local government debt and the property market,” the update noted.
“The Chinese central bank’s initiative to inject one trillion yuan of liquidity aims to reassure investors that the government is committed to achieving its five percent GDP growth target,” it added.
“However, the lack of a clear timeline and the absence of measures to address structural issues, such as weak consumption and reliance on infrastructure investments, have only increased ambiguity amongst market participants,” it continued.
The update stated that Rystad expects the support for oil prices to be short-lived unless more detailed policy measures are announced in the coming weeks when the Standing Committee of the National People’s Congress reviews and votes to approve the proposal.
“While the markets wait for China, U.S. inflation rates fell to 2.4 percent in September 2024, bringing the Federal Reserve closer to its two percent target,” it said.
“Optimism is growing that these rate reductions will help guide the economy to a soft landing, avoiding a recession,” it added.
“Eurozone inflation is forecasted to be reported at 1.8 percent in September, down from 2.2 percent in August. All eyes are on the European Central Bank’s (ECB) next move, with markets expecting a quarter-point rate cut on 17 October, pushing rates to 3.4 percent,” it continued.
Oil Fundamentals
Looking at oil demand fundamentals, the update noted that China’s Golden Week holiday boosted gasoline demand but warned that a decline is expected now that the holiday has ended.
“However, cooler temperatures and reduced rainfall are expected to support an increase in construction and industrial activities, as well as harvesting and plowing in the agricultural sector,” the update said.
“Rystad Energy estimates that the country’s oil demand growth is now expected to slow significantly, contributing only 108,000 barrels per day (bpd) in 2024,” it added.
In the update, Rystad said China’s gasoline demand has plateaued as the sales share of electric vehicles (EVs) exceeds 50 percent and noted that distillate demand has dropped by 100,000 bpd due to economic challenges and the rise of LNG trucks.
“While naphtha demand for petrochemicals remains strong, its growth is easing from a downcycle,” it added.
“Jet fuel is one of the few products showing recovery, driven by rising international flight demand,” it said.
The update on oil supply stated that Iraq’s under-compliance has been a key focus in October.
“Throughout the first half of this year, Iraq has struggled to meet its OPEC+ allocated quotas. This struggle has resulted in an average overproduction of about 300,000 bpd,” the update said.
“In August, the surplus was reduced to nearly 200,000 bpd as pressure from the OPEC group increased regarding Iraq’s compliance with the OPEC+ limits,” it added.
“According to official statements, Russia reached its OPEC+ voluntary cut target in August and even began compensating in September. Despite this, we still estimate an overproduction of around 40,000 bpd,” it continued.
The Rystad update stated that the ongoing loss of supplies from Iran and significant disruptions in trade flows will continue to keep the market on edge.
“The U.S. has expanded its sanctions on Iran’s oil and petrochemical sectors,” Rystad highlighted in the update, adding that the U.S. “is also urging Israel to explore alternatives to striking Iran’s oil and nuclear facilities”.
$80 Range
Rystad revealed in the update that the company believes oil prices will likely stay near the $80 range, “as backwardation in the crude market remains a primary objective for OPEC+.”
“Brent M1-M3 backwardation is hovering near $1 per barrel indicating tightness in the prompt month,” the update highlighted.
“However, the emerging overhang in oil supply in 2025 and fear of contango will continue to weigh on OPEC+ calibrating their announced unwind plan,” it added.
“OPEC+, while curtailing crude supply, has continued to push a large amount of product exports to the market, dampening refinery margins. Any crude supply unwind plan to be credible needs to compliment … [a] cut in product exports,” it stated.
China a Critical Player in Energy
In a market analysis sent to Rigzone on Monday, Antonio Ernesto Di Giacomo, a Senior Market Analyst at XS.com, said, “China, the world’s largest oil importer, is a critical player in the global energy market, and any changes in its economy significantly impact crude demand”.
“The recent deflation in the Asian country has caused unease in international markets, suggesting a weakening economic growth and a potential decline in oil import needs,” he added.
“Despite geopolitical tensions in the Middle East, particularly concerns about a possible escalation of the conflict between Israel and Iran, economic data from China has dominated the market,” he continued.
In the analysis, Di Giacomo noted that the conflict in this key oil-producing region could affect global supply if hostilities intensify. He added, however, that uncertainty over China’s economic future has had a greater influence on investor decisions, “with more focus on signs of economic weakness from the world’s largest oil consumer.”
“The low economic growth in China and the insufficiency of its fiscal stimuli have generated skepticism about its economic recovery,” Di Giacomo warned in the analysis.
“The Chinese government’s economic policies have failed to dispel market doubts, as more substantial measures were expected to stimulate growth,” he added.
“As a result, the lack of confidence in China’s ability to boost its economy has led to a projected decrease in oil demand, negatively impacting crude prices in international markets,” he continued.
“In this context, the relationship between oil demand and the Chinese economy becomes more evident,” he went on to state.
Di Giacomo highlighted in the analysis that analysts are closely monitoring China’s economic decisions, “as any sign of revival or stagnation in its economy could directly impact oil prices”.
“While tensions in the Middle East pose a latent risk to supply, it is the Chinese economy and its policies that, in the short term, appear to be dictating the direction of crude prices,” he pointed out.
“The evolution of China’s economy will be a crucial factor to watch, as any significant change in its economic policy could soon influence demand and crude prices,” he said.
To contact the author, email andreas.exarheas@rigzone.com
About Rystad Energy
Rystad Energy is a leading independent energy research and business intelligence company based in Norway. It is known for its comprehensive data analytics and forecasting services in the global energy sector. Founded in 2004, Rystad Energy provides insights across various segments, including oil and gas exploration and production, renewable energy, and energy transition. The company utilizes advanced data models and proprietary databases to deliver critical market intelligence, strategic insights, and tailored consulting services to clients, ranging from industry operators and investors to government agencies. With a strong focus on transparency and data integrity, Rystad Energy aims to empower decision-makers to navigate the complexities of the energy landscape and adapt to the challenges of a rapidly evolving industry.
