This article was written by Bloomberg Intelligence Senior Industry Analyst Henik Fung. It appeared first on the Bloomberg Terminal.
China’s dropping PPI and falling oil imports suggest its post-reopening energy demand is stumbling out of the gate. Plunging rates for oil tankers to India and South Korea’s tumbling export growth confirm the region’s economic struggle. Government supports would be key to keeping the flame lit on growth and energy consumption. Oil prices could dip in 2023.
Oil demand could take cue from China’s falling PPI
China has something new to worry about, as flagging economic growth may pose a bigger challenge to Beijing. The country’s producer price index (PPI) plunged to minus 3.6% year-over-year in April, vs. the peak of 13.5 % in October 2021 — the fastest growth since 1995. China’s April manufacturing slowed to 49.2 from 51.9 in March, suggesting possible economic stagnation ahead, and domestic affordability could be weak enough to rattle the recovery for both the economy and crude usage.
China’s PPI and WTI’s monthly movements have been highly correlated since 2008. If past is a guide, the oil price and demand could fall while China’s PPI stays in negative territory.
China’s oil imports signal stalled recovery
A recovery in oil demand following China’s November reopening could prove to be elusive. Our calculations, based on Bloomberg’s daily crude import data as of May 13, shows that China’s May crude imports could amount to 13.3 million barrels a day, flat from a year ago. This suggests oil demand remains sluggish following the country’s reopening, and could face weaker demand in the coming months amid global economic turbulence.
Plunging tanker rates amid Asia’s slowing oil demand
Asia’s tenuous recovery has reduced the region’s appetite for crude. The 80.6% plunge in the oil-tanker rate for the Arab Gulf-India route to $23,752 a day on May 12 suggests Asia’s oil demand has been weakening since March, particularly in China and India. The global economic headwind following US Fed rate hikes, banking turmoil and debt ceiling struggle makes for dimmer growth, lower energy consumption and a decline in oil-tanker rates.
South Korea’s exports drop a bad omen for Asia demand
South Korea’s exports serve as a bellwether of the broader global economy, undulations of which closely mimic changes in oil prices, reflecting its prominence in global industrial activity and its voluminous exports. South Korea’s export growth has been negative for seven straight months, a telling symptom of the global economic slowdown, with a bottom possible on a 20% contraction. Such a scenario unfolded on three previous occasions, in 2001, 2009 and 2020. If history is a guide, oil demand could fall and the price slip to the $50-$60 range before 3Q, based on its correlation with South Korea’s export growth.
