Worsening COVID-19 Situation In China Compounds Oil Price Bearishness

Key Highlights

• China’s COVID-19-related lockdowns are worsening.
• This will drag on its economic growth that has powered oil prices before.
• The situation may get worse as the government continues to enforce its strict COVID policies. 

As highlighted well over a month ago by FX Empire as a key reason to expect further bearish pressure on crude oil prices, fears of a greater slowdown in China’s economic growth related to a deteriorating COVID-19 situation in the country have pushed oil prices lower again.

According to several local news reports, 51 new COVID-19-related deaths were reported yesterday, the highest one-day death toll so far, up from 39 the day before. Vague hopes by some analysts of a looser application of China ‘zero-COVID’ strategy have been dashed. The worsening rate of infection has resulted in an even stricter enforcement of the rules and of the hard lockdowns in economic powerhouse city Shanghai being rigorously implemented.

China’s Backstop Bid For Oil Has Been Removed From The Price

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

The outlook for China’s economic growth is unlikely to get better anytime soon and may significantly deteriorate further from here.

“The spread of omicron in Jilin province dented consumer sentiment leading to a 3.5 percent year-on-year [y-o-y] contraction in retail sales in March and although the adoption of the closed loop operations in cities like Shenzhen limited the impact on manufacturing activity, industrial production showed a pullback in growth by the end of the quarter,” Eugenia Fabon Victorino, head of Asia Strategy for SEB, in Singapore, told FX Empire.

Even before the local transmission of COVID surged in mid-March, many major banks had already viewed the Chinese government’s economic growth target for the year of ‘around 5.5 percent’ as overly optimistic. Given the likely ongoing effects of China’s handling of COVID-19 outbreaks and the frequency of these infections this scepticism looks well-founded.

Beijing Has Reiterated Hardline COVID Rules

“Despite acknowledging the economic costs of China’s COVID strategy, Beijing has not shown any inclination to back away from its low tolerance policy,” highlighted Victorino. “President Xi Jinping recently reiterated that ‘prevention and control work cannot be relaxed’ and this message was echoed by Premier Li Keqiang when he prompted local authorities to act with a ‘sense of urgency’ in carrying out the strict COVID policy ahead of the Communist Party National Congress in autumn,” she concluded.