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Oil prices slide on worries over China economy and higher crude output

To state that burgeoning oil crude prices are burning a hole in a taxpayer or a middle-class consumer’s pocket will be an understatement. Given the already increased healthcare expenditure during the pandemic, it wouldn’t be farther away from the truth to maintain that a middle-class income consumer in India is suffering under the government’s ill thought strategy of earning revenue. It is to be noted that the prices of crude, oil or petrol is a daily need in some cities around the country, its price has increased to a whooping Rs. 100 and much of its credit goes to the Indian government’s strategy to raise lost taxes through gasoline prices in order to cover its expenses.

Decline in oil prices

But in an interesting turn of events on Monday, oil prices fell by more than $1. This was due to various worries and speculations that China’s economy’s robust recovery, on low economic base, had fallen significantly in the recent month. According to the survey that had been conducted in China, it was emphatically reported that growth in factory activities had sharply slipped in the world’s second-largest oil consumer i.e. in fastest growing economy in Asia, China.

Now as a general rule of demand and supply, as the economic activity in China slipped, the demand for crude oil too plummeted. This led to concerns that were compounded by a rise in oil output from OPEC producers. Now due to rise in supply and fall in demand, by the second largest consumer, lead to worry among OPEC countries as price fell sharply at the back of plummeting demand.

OPEC at 60: An oil cartel on life support | Business| Economy and finance  news from a German perspective | DW | 14.09.2020


As per reports, the Brent crude oil futures slipped by $1.12 or 1.5 per cent to $74.29 a barrel. On the other hand, US West Texas Intermediate (WTI) crude futures too dropped by 97 cents or 1.3 per cent to $72.98 a barrel.

Edward Moya, the senior analyst at OANDA maintained that “China among all the economies has been leading economic recovery in Asia. Therefore, if the pull-back deepens, concerns will grow that the global outlook will see a significant decline,”.

He additionally stated that “The crude oil demand outlook, currently, is on shaky ground and that probably will not improve until global vaccinations improve.”

The China factor

Crude oil prices slide on worries over China economy and higher crude output  - The Economic Times

But given China’s robust growth prospects and higher rate of recovery compared to neighboring nations, what lead to the fall in its economic activity? It is to be noted that China’s factory activity growth slipped sharply in the month of July. This was due to the fact that demand contracted significantly for the first time in more than a year. This was shown by a business survey that indicated fall in demand due to high product prices.

It is no news that the complete eradication of the pandemic is a distant dream and China too, like other nations, is fighting the common enemy on the front lines. Thus, due to the presence of this enemy inside its borders have led to restriction in supplies and supply chain activity throughout the economy which has led to a surge in product prices.

As aforementioned, the consumers are already burdened under increased medical expenses, a higher CPI additionally  would definitely lead towards lower demand in the economy. On the other hand, the consumer and producers’ sentiment are at an all-time low, given robust predictions of third wave. This too has led to a decrease in the demand in the economy and hence in economic activities.

On the other hand, the weaker results in the private survey, in respect to export-oriented and small manufacturers has shown deeper demand crisis in the economy. The results in the private survey too have been broadly aligned with those in the official survey. The official survey released in Saturday too had showed  that activity in China was growing at the slowest pace in 17 months.

Supply problems

Oil falls over 3% on concerns over demand and OPEC supply boost | Reuters

It is to be noted that China alone cannot be attributed as the cause for the crude oil prices problem. This is to mean that OPEC too has its valued contribution in the untimely crude prices debacle. According to a recent Reuters survey that was conducted, it was found that oil output from the Organization of the Petroleum Exporting Countries (OPEC) rose robustly in the month of July to its highest.

It is to be noted that according to reports this is the highest since April 2020. This was due to the fact that OPEC further had eased production curbs under a pact with its allies. It was only Saudi Arabia, a top exporter, which had phased out a voluntary supply cut. The pact was forced and requested by various countries as the supply cuts were leading to a huge fiscal and monetary burden on various country which were still recuperating from the pandemic. India too among various other nations was an endorser of the pact that led to easing to the supply curbs by the OPEC nations, except Saudi Arabia which was adamant on its detestable stance.

The solution

An oft repeated mantra to end the covid debacle has been robust vaccination. While coronavirus cases continue to rise globally, analysts and experts around the world have again and again maintained that higher vaccination rates are the key. It has been quite vehemently repeated that vaccination would limit the need for the harsh lockdowns that would help revive the demand and hence economy. It is to be noted that severe supply constraints had gutted demand during the peak of the pandemic last year.

How India can benefit from the situation

Really, not only India but many other countries out there can to benefit from the untimely situation. Given the huge monetary and fiscal constraint that countries are right now facing, a lower crude price is an unadorned opportunity. Thus, India too can make the most of the opportunity that lower crude prices present. But on the other hand, it is quite a possibility that India can try to profit from this opportunity and let petrol prices in the economy rise to cover its cost revenue disparity.

Last month, according to reports, India’s daily gasoline consumption had exceeded pre-pandemic levels. This was due to the fact that the states had relaxed Covid-19 lockdowns while gasoil sales were still low. With less stringent lockdowns in place, the demand for gasoline in the economy increased.

On the other hand, US has stated that it will not lock down again to curb Covid-19. But given the present circumstances and virulent nature of the pandemic, things can get worse as the Delta variant can fuel a surge in cases. Such a claim has also been made by the top US infectious disease expert Dr Anthony Fauci.

Thus, what can be expected of the situation will get clearer only in future, depending on what stance various countries take.

Edited by Aishwarya Ingle



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