Oil and Gas Global Series: The impact of China

The trade war between China and the US is dominating the headlines. The uncertainty created has had an impact on markets, which in turn affects oil and gas stability. What is it about China that has attracted the attention of the US and how else might this powerhouse economy impact the sector?

China’s slowing economic growth

At the start of the year, China revised its economic growth target down to 6%. In global terms, this is still healthy growth. However, the analysis comes as a result of the unexpected fall in exports for China in December. This was the most significant drop in two years. The revised growth target comes despite the government’s considerable efforts to boost growth with infrastructure spending and tax cuts. News has since emerged of a slowing of Chinese industrial activity due to a weakening global demand.

The US is intent on putting pressure on China because of a trade surplus of $323.32 billion. They also have a host of issues with intellectual property rights and trade problems that extend beyond such staggering numbers. Therefore, the tariffs battle with the US is causing significant challenges to China – and as a consequence – the confidence of world financial markets.

How does this impact the global oil markets?

China, with its astronomical growth, was providing a lucrative market for global oil. For China to then announce such troubling growth targets, the impact weighs particularly heavily on oil markets. In direct response to the announcement by China about economic slowdown was a 1% drop on the Brent crude futures. It dipped below $60 per barrel. Other futures were also down, including West Texas Intermediate.

Even though the growth of the Chinese economy is influenced by domestic issues, there is no doubt that the health of the oil markets relies on the successful completion of trade talks between the US and China. Failure to reach a deal could mean that Trump raises tariffs from 10% to 25%, as well as increasing the products under tariff to cover almost everything imported into the US. This is not the worst-case scenario for oil markets. Worst still would be no deal, which would ultimately slow global economic growth and so diminish demand for oil. The pain of such a drop in demand would be felt across the oil-producing world.

China’s domestic oil production

Potentially more significant is Chinese isolationism, or at least the desire to be self-sufficient in energy production. As a communist state, the national oil production is under the control of the government. Despite the fields being unprofitable, President Xi demanded that oil output increase. Investors are nervous that the capital expenditure in old fields and the cost-intensive development of new fields is not a sound move.

Despite concern, China’s state-run oil companies: SINOPEX, CNPC and CNOOC have ambitious plans to plough billions into increasing production as ordered. The amounts are mind-boggling, and most perceive there to be no obvious return. This might suggest that freedom from international oil markets may be more important than any financial return.

In short

As one of the fastest-growing economies, the state of health of China and the country’s trade with the rest of the world is significant. A small ripple in confidence in trade with China and oil futures tend to turn bearish.

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