Oil Eyes Further Downside On Growing China COVID Crisis

Key Highlights

• COVID-19 mass testing programs now in full operation in Beijing and other cities.
• Expanding lockdowns will continue to crimp China’s economic growth.
• Supply fears for oil have not been meaningfully apparent.

With the announcement overnight of mass testing for COVID-19 being rolled out across China’s capital, Beijing, and other cities, trader concerns over ongoing soft demand in the crude oil market are likely to continue to weigh on prices.

According to local Chinese news reports, yesterday saw the country report 48 new symptomatic and two new asymptomatic COVID-19 cases in Beijing. This followed the second round of COVID-19 testing yesterday for millions of people in the capital and news that similar measures are being taken in Hangzhou, which has a population of 12.2 million.

As highlighted earlier this year by FX Empire and reiterated since, hopes from some analysts and traders that the Chinese government might relax its strict ‘zero-COVID’ strategy to reduce the negative economic impact of repeated widespread lockdowns were ill-founded.

Short-Term Measures Won’t Solve China’s COVID-Related Economic Problems

Similarly misplaced are corollary views that the economic damage to China might be meaningfully offset by short-term economic stimulus measures.

“Even before local transmission of COVID surged in mid-March, we had already viewed the growth target of ‘about 5.5 percent’ as too ambitious and the incoming data in April will likely show an even deeper slowdown,” Eugenia Fabon Victorino, head of Asia Strategy for SEB, in Singapore, told FX Empire. “If current [COVID-19 related] restrictions persist, there is a risk that Q2 GDP could sequentially contract,” she added.

China has been the big backstop bid for oil in the global market over the past two and a half decades based on its stellar economic growth and remains remains the largest annual gross crude oil importer in the world, having surpassed the US in this regard in 2017, according to EIA data.

Supply Fears Have Proven Largely Unfounded

As also posited by FX Empire, the much-mooted supply squeeze resulting from the ongoing Russia-Ukraine conflict has also not been meaningfully present in the market. The view that a supply crunch will result any time soon as a result of a committed ban on Russian oil by the European Union also looks unlikely, given recent events highlighted by FX Empire.

Underlining the notion of no significant disruptions in oil supply currently was the release earlier this week of the American Petroleum Institute (API) figures that showed a huge build in crude oil inventories over the previous seven-day period of 4.784 million barrels, compared to analyst consensus predictions of just 600,000 barrels.