Oil Impacted by China Stimulus

Some Asian stocks rose on Wednesday, November 15, on restored prospects of stimulus in China and an end to interest rate hikes in the US. Moreover, while China's October industrial output and retail sales topped forecasts, property sales and investment continued to decline sharply, calling for low-cost financing.

Crude oil (CL) prices also edged higher on Wednesday, as the upbeat economic data from China allowed investors to cheer the upward revision to the oil demand growth forecast announced by the International Energy Agency (IEA) on Tuesday. Traders had been cautious ahead of supply data and positioning for the OPEC+ meeting later this month, with the commodity ending Tuesday’s session mixed.

Moreover, a weaker US dollar (DX) was seen providing support by making crude cheaper for non-dollar buyers. 

WTI Oil Supported by Trove of Reports

One of the early catalysts for optimism that was later offset was the IEA raising its estimates for oil demand in 2023 on November 14, citing strong Chinese oil demand due to a petrochemical boom. It projected oil demand growth of 2.4 million barrels per day in 2023, up 100 thousand barrels from its prior estimate, and raised its supply growth estimate by 200 thousand barrels per day. 

Furthermore, oil prices rose slightly following a positive array of data reports released on Wednesday in China. China's consumer spending and industrial production in October provided a well-needed economic boost, offsetting some of the recent weakness in the data front. Retail sales grew 7.6% year-over-year, while industrial production rose 4.6%, suggesting that China's economy has some firepower heading into 2023 despite recent warning signs. 

However, despite the positive data, China's economy continues to show mixed signals as its overall economic recovery has been slower than expected, and it is facing a series of challenges ranging from high unemployment to high property debt.

According to data released overnight, property sales fell 7.8% year-on-year in January-October vs. a 7.5% slide in the first nine months of 2023, indicating that the crisis-hit sector is still in decline despite prior support efforts by the government. 

The poor property market data overnight triggered a reaction from the People's Bank of China (PBOC). The bank offered 1.45 trillion yuan ($200 billion) of cash through its medium-term lending facility, the biggest cash injection since late 2016. Along with plans to provide at least 1 trillion yuan of low-cost financing for urban village renovation and affordable housing programs, fears of a liquidity crunch abided. As a note, crude oil prices typically react positively to stimulus measures. 

A View Behind the New PSL Scheme

Chinese policymakers have a difficult situation as they need to balance supporting the economy's recovery while addressing other issues. 

In its effort to support the housing market, the Chinese government plans to inject at least 1 trillion yuan in sovereign bond financing towards renovating urban villages and affordable housing programs. Although a similar program was criticised for fueling a real estate bubble in smaller cities, officials see it as a way to stimulate the property market. 

The Pledged Supplemental Lending (PSL) scheme, or else known as “helicopter money”, could start as soon as this month and aims to put a floor under the property market downturn, impacting economic growth and consumer sentiment. China's support measure is seen as optimistic, though the property sector remains a concern.

The Outlook for WTI Through China’s Lens

According to Fitch Ratings, the Chinese government has the capacity to mitigate any risks at hand and support the economy through policy easing. Still, a disorderly adjustment or policy missteps could lead to a sharper slowdown, a material rise in debt, and a deterioration of financial stability. But for now, China’s injection is aimed at keeping the banking system liquid to support the economic recovery, a stark signal it wants to support the corporates. (Source: Fitch Ratings)

As China's non-state-owned enterprises' quotas are running out, independent refineries are not wrong to expect the government to raise the fuel oil import quotas for 2023 and allow them to import more fuel oil barrels as an alternative feedstock. The IEA also expects China to account for a big chunk of three-quarters of global oil demand it forecasts at 2.4 million barrels per day this year. However, it also sees the oil market returning to a surplus early next year, which could weigh on prices come 2024, pointing to a somewhat mixed outlook for oil prices going forward.

Moreover, China's oil refinery throughput in October declined slightly from the month prior due to weakening industrial fuel demand and narrowing refinery margins. However, run rates were 9.1% higher than in October last year, and crude oil imports increased 13.5% year-on-year in October.

On the flip side, growth from September was relatively modest at 3.6%,  and US oil production hit a record high of 13.05 million barrels per day in August 2023, surpassing the previous record from November 2019.

Conclusion

While China's economy shows mixed signals and is recovering slower than expected, the $200B stimulus injection and policy support measures may have generally influenced the economy and oil markets positively. However, the property sector remains a concern, and the outlook on oil prices remains somewhat mixed as we head towards the end of the year, making monitoring how these factors interplay all more important and causing volatility in oil prices.