The weak Chinese economy has pushed oil prices down nearly $5 this week. Industry in particular is struggling, but growth in the services sector is also starting to slow down. Due to the low price, all eyes are on OPEC+. At the moment, Russia and Saudi Arabia are discussing a further reduction in oil production.
The oil price has fallen significantly this week. On Thursday, May 25, Brent crude was trading at $76,26. Until Monday, May 29, the oil price rose slightly to $77,10. The following two days, all of May's recovery was lost and the price fell to $72,60, the lowest price since December 2021.
The sharp loss follows new economic figures from China. Chinese industry again performed worse than expected in May. According to the Chinese Industrial Index of the National Statistics Bureau (PMI), the industry shrank more than last month. The number of points in the PMI indicates how strongly the economy is growing or shrinking. The industry grows when the PMI is above 50 points. If the PMI falls below 50 points, the economy shrinks.
The market expected the contraction to be slower in April. A large survey of economists by Reuters showed an expectation of growth to 49,4 points. This is not the first month that Chinese industry has performed weaker. Last month the PMI turned from growth to contraction. In March, the PMI shrank from 51,9 points to 49,2 points.
Lower western demand
The cause behind the contraction is starting to become clear this month and that is the contraction in exports. As a result of the economic malaise in the United States and Europe, demand for Chinese products in the West is lagging behind. Last month there was a slight increase to a reading of 50,4 points. The PMI for exports has now fallen to 47,6 points.
By the way, this is not the only bad news for China. For the first time since the corona pandemic, the PMI outside the manufacturing industry is also starting to decline. The previous PMI for the services sector stood at 56,4 points, but in April the PMI stood at 54,5 points. Although the services sector is still growing, growth in this part of the economy also appears to be slowing down.
All eyes on OPEC+
The contraction of the Chinese economy and lower industrial activity has a strong impact on global oil demand. According to the International Energy Agency (IEA), the relationship between supply and demand can change at any time. In the second half of 2023, supply would exceed demand due to the growth of the Chinese economy. Even after the contraction of Chinese industry, the IEA maintained its forecast. The demand for kerosene would be leading.
Due to the weakening economic demand, the market seems to be paying less and less attention to the forecast. Meanwhile, the price of oil at around $70 is far away from the price of more than $100 that banks had in mind for this period of the year. That is why there are rumors that OPEC+ could further reduce oil supply. In particular, the warning from Saudi Energy Minister Abdulaziz bin Salman that 'investors shorting the oil market should be careful' caused unrest. In May, the OPEC countries already lowered their production targets by 1,16 million barrels per day. A quick follow-up intervention now seems unlikely. Russia does not seem to want to hear about lower targets. Deputy Prime Minister Alexander Novak contradicted the rumors this week.
The diesel price reversed its course again this week. On Thursday, May 25, 100 liters of diesel traded for €112,36. On Wednesday, May 31, the diesel price was a lot lower. The fuel that day was €109,87.