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Coronavirus lockdowns sent oil prices into free fall, but Chinese manufacturing data hints at brighter prospects
- Cuts in global oil production at the same time as signs that economic activity in China is returning to a degree of normality should support the price of crude
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The Covid-19 pandemic has played havoc with oil prices. With governments around the world following China’s lead and instituting lockdowns to check the spread of the coronavirus, economic activity has plummeted and, with it, global demand for energy. The price of oil has plunged.
But China is moving again and that should put a base under crude. There will be bumps in the road but if China, the world’s second-largest economy, is starting to regain its poise that must have a material impact on demand for crude oil.
At the same time, following a deal on April 12, big cuts in oil production, agreed between Opec and nations such as Russia, should start to kick in. Lower output in other oil producers, such as Canada, Norway and the United States, will complement the Opec+ accord. State-backed CNOOC, China’s dominant offshore oil and gas producer, is cutting production in its US shale oil and Canadian oil sands projects.
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The International Energy Agency said in a report, following last month’s agreement, that “global oil supply is set to plunge by a record 12 million barrels per day (bpd) in May”.
In reality, the announced oil production cuts “won’t rebalance the market immediately”, the IEA wrote, “but by lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis, whose consequences for the oil market remain very uncertain in the short term”.
China itself has been accumulating oil at bargain prices. According to calculations by Reuters, based on data from China’s General Administration of Customs, against the backdrop of Covid-19, China’s crude oil imports in March increased 4.5 per cent on an annualised basis to 9.68 million barrels per day, as Chinese refiners loaded up on cheaper shipments.
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