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Commodities Week Ahead: With China on Holiday, Oil Braces for Week of Unknowns 

By Barani Krishnan/Investing.comCommoditiesJan 23, 2023 04:48AM ET
www.investing.com/analysis/commodities-week-ahead-with-china-on-holiday-oil-braces-for-week-of-unknowns-200634609
Commodities Week Ahead: With China on Holiday, Oil Braces for Week of Unknowns 
By Barani Krishnan/Investing.com   |  Jan 23, 2023 04:48AM ET
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  • China’s Lunar New Year holiday brings both trepidation and excitement to oil
  • Chinese factories close a week at least, causing a temporary blip in crude demand
  • On reopening, Chinese demand for oil and raw materials is typically explosive 
  • China’s COVID crisis could change this year’s post-holiday narrative though

It’s the time of year when commodity traders get nervous and excited in almost equal measure. 

China’s Lunar New Year, which began at the weekend, is officially observed for a week, with some businesses and factories closed for even longer. Consumption of oil and raw materials typically plunges at this time, causing a temporary blip in demand in the world’s largest importer of crude and most other commodities. 

On reopening, Chinese industries often see turbocharged-like operations that more than make up for what they did not consume during the holidays. This is what oil bulls are counting on; China’s demand for crude will explode from February onward, heightening a price rebound that began in mid-January.

This year though, something could change China’s post-Lunar New Year narrative and, with that, its demand for oil, base metals, and other raw materials. And that is the nation’s COVID crisis. 

Health experts expect huge new spikes of COVID infections as the Chinese people freely traveled and mingled for the first time in three years following Beijing’s removal of all safeguards it had put in place since the country’s first coronavirus outbreak in 2020.

China’s Ministry of Transport estimates over 2 billion passenger trips will take place during the Lunar New Year season, which in some parts of the country goes on for as long as 40 days as people return to far-flung hometowns for reunions. If true, that’s great for fuel demand.

On the other end, the number of COVID patients needing critical care in Chinese hospitals has peaked. Nearly 60,000 people died in Chinese hospitals between December 8 and January 12 from complications caused by the virus after China abruptly scrapped, under public pressure, its “zero-COVID” policy.

The World Health Organization’s executive director for health emergencies, Mike Ryan, suggested earlier this month China’s health data “under-represent the true impact of the [coronavirus] disease” in terms of hospital and ICU admissions, as well as deaths.

That’s important because Wu Zunyou, chief epidemiologist at China’s Center for Disease Control and Prevention, said on Saturday – the eve of the Lunar New Year – that the present “wave of the epidemic has already infected about 80% of the people” from the 1.4 billion population. He was implying that with such great numbers infected, China was probably heading to full immunity from the virus, meaning a minimal risk of hospitalizations and deaths.

Those long oil will be counting on Wu’s prognosis to come true, and that work gets off to a flying start after the holidays. Crude demand in China could spike by as much as one billion barrels per day this year, as per a Reuters forecast, or two billion bpd, as reported by Bloomberg — depending on what one wants to believe.

The facts show that China’s economy ended 2022 in a major slump. Factory activity in the country contracted in December at the fastest pace in nearly three years. The official manufacturing purchasing managers’ index (PMI) slumped to 47 last month from 48 in November, according to the National Bureau of Statistics. It was the biggest drop since February 2020 and also marked the third straight month of contraction for the index.

China’s non-manufacturing PMI, which measures activity in the services sector, plunged to 41.6 last month from 46.7 in November. It also marked the lowest level in nearly three years. And although the government has stepped up its support for the property market, the effects are still slow to take effect – home sales fell again in December.

Said John Kilduff, founding partner at New York energy hedge fund Again Capital:

“The oil bet on China is huge, and people will be watching the country’s industrial data like hawks from next month to draw inferences on crude and fuel demand. Oil bulls will be praying that outright import numbers for crude, as well as the country’s PMIs, are higher-than-forecast in order to keep alive this premise of runaway demand. Without those, oil could go back to December lows.”

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, was at 81.50 a barrel by 01:40 ET (06:40 GMT), down 14 cents, or 0.2% on the day. WTI is up 1.3% on the year after collapsing to a one-year low of $70.11 in December from the Ukraine-invasions highs of more than $130 in March last year. 

London-traded Brent, the global crude benchmark, was at $87.43, down 20 cents, or 0.2%. Year-to-date, Brent is up 1.8%. It hit a one-year low of $75.11 in December, plunging from a March 2022 peak of almost $140.

While a China demand surge would undoubtedly be bullish for oil, a potential recession in the United States and other major Western major economies could hamper crude consumption this year. The U.S. and most of the Eurozone are struggling with elevated inflation and tight monetary policy, which are expected to persist through the year, forming the base for a recession.

The U.S. is to publish a first estimate of fourth-quarter gross domestic product on Thursday, with analysts expecting the economy to have expanded by an annualized 2.6%, after 3.2% in the third quarter.

While this appears strong, more recent economic data have pointed to the economy losing momentum at the end of 2022 - retail sales fell by 1% or more in the last two months, industrial production declined for the past three and residential construction has posted six straight monthly declines.

GDP is expected to weaken in the coming quarters as the Federal Reserve’s aggressive rate hikes continue to hit demand.

The economic calendar also includes data on initial jobless claims, durable goods orders and new home sales on Thursday and the personal consumption price index on Friday.

Also in focus this week is the standoff over the U.S. debt ceiling, which looks likely to loom large over financial markets as the U.S. earnings season continues. 

The U.S. government hit its $31.4 trillion borrowing limit on Thursday amid a row between hardline Republicans and President Joe Biden’s Democrats over raising the country’s debt ceiling. House Republicans want cuts to government spending before they approve a higher ceiling; a similar demand in 2011 prompted S&P to cut the U.S. credit rating for the first time and caused chaos in financial markets.

The high-stakes deadlock is widely expected to last for months and could come down to the last minute as each side tests the other ahead of June - the date beyond which the Treasury will likely have exhausted emergency maneuvers to stave off default.

“From both an economic and a financial perspective, a failure to raise the debt ceiling would be an unmitigated disaster,” said David Kelly, chief global strategist for JPMorgan Chase & Co funds.

DisclaimerBarani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about. 

Commodities Week Ahead: With China on Holiday, Oil Braces for Week of Unknowns 
 

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Commodities Week Ahead: With China on Holiday, Oil Braces for Week of Unknowns 

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Comments (7)
KAMAL AHMED
KAMAL AHMED Jan 24, 2023 11:52AM ET
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Thank you Mr Barani for in-depth analysis.
Barani Krishnan
Barani Krishnan Jan 24, 2023 11:52AM ET
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Thanks much, Kamel jee.
Zzzz
Zzzz Jan 23, 2023 12:52PM ET
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0097334509912
EL LA
EL LA Jan 23, 2023 12:51PM ET
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It is also unknown whether offshore wind projects are responsible for many of the dead whales rolling up on the beaches of New Jersey, North Carolina, and Oregon. Perhaps development needs to halt immediately and further studied for a few years, just to be safe. How many whales must die for wind power?  Environmentalists are becoming increasingly alarmed. Imagine the sudden need for more oil and gas should wind power turns out to be an environmental disaster?!
Barani Krishnan
Barani Krishnan Jan 23, 2023 12:51PM ET
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Totally irrelevant to this week's discussion on oil. But I can understand your bent.  Cheers - B.
Broc Bellmore
REDcandleCLUB Jan 23, 2023 12:51PM ET
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Barani Krishnan lolol. Barani for pres of the club
Barani Krishnan
Barani Krishnan Jan 23, 2023 12:51PM ET
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Stock Market Genius
Stock Market Genius Jan 23, 2023 9:46AM ET
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I highly believe copper will be above $4.50 in February.
Mr Stoch
MrStoch Jan 23, 2023 9:35AM ET
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The covid can’t really change a lot before a considerable amount of time has passed. On the conteary to the unknown, we know that: Chinese demand will have the fastest ever shift in volume. Russian oil will soon be banned for import for no less than 1 billion consumers. And production output is set to fall compared to consumption without being in proportion.
Broc Bellmore
REDcandleCLUB Jan 23, 2023 7:26AM ET
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Another good article. Lots to consider in coming weeks.
Barani Krishnan
Barani Krishnan Jan 23, 2023 7:26AM ET
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Thanks much for the feedback. Wishing you a productive week.
Mahesh Parmar
Mahesh Parmar Jan 23, 2023 6:53AM ET
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Sir my prediction might oil will correct to 60 ofd level
Gonzalo Ribeiro
Gonzalo Ribeiro Jan 23, 2023 6:53AM ET
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$60 oil would be a huge buying opportunity
Barani Krishnan
Barani Krishnan Jan 23, 2023 6:53AM ET
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and Mahesh. Thanks for the feedback. Let's see where it goes. At the moment, it's rising on thin air in the absence of any real supportive data.
 
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