China’s Kovid lockdown is the biggest threat to oil markets

A sharp drop in crude oil prices last week on news that China had extended a Covid-19 lockdown for the majority of its 21 million residents in Chengdu, the capital of the southwestern province of Sichuan, has again led to such news. highlighting its potential. A sudden sharp drop in oil prices in a market characterized by uncertain demand and supply. As the largest annual gross crude oil importer in the world, ahead of america, In this regard in 2017 (total became the world’s largest net importer of petroleum and other liquid fuels in 2013), China has long been the global backstop bid in the oil market. Between 2000 and 2014, it almost single-handedly accounted for the commodity pricing super-cycle that occurred during that period. Such drastic COVID-related lockdowns have a direct and significant impact on China’s economic growth, which in turn affects its oil demand, and the lockdown is a direct function of the country’s ‘zero-Covid’ policy. There is no indication that this policy will be substantially amended, abandoned any time soon. To a large extent, China’s adherence to its zero-Covid policy, which immediately introduces ultra-tight lockdowns across cities to identify relatively small numbers of COVID-19 cases, was one of the country’s early successes. product has been. handling the pandemic. China emerges from first major wave of Covid-19 in the first half of 2020 better economic size Compared to any other major country, precisely because it is harder to deal with any outbreaks of disease, because it had not managed to actually produce effective vaccines of its own and have been tested for proven vaccines from non-domestic suppliers. Refrained from buying. When China was hit by a massive COVID-19 outbreak earlier this year, and many major cities were shut down, oil prices fell on the prospect of low demand from China, but as far as Could not drop widely. Based on the belief that in the near future China will probably be forced to take a softer approach to dealing with COVID-19. Last December saw a refinement of the zero-Covid strategy, incorporating the idea of ​​’dynamic clearing’, which gave local governments more flexibility in imposing restrictions, limiting the daily increase in symptomatic cases nationally to around 200 Can go , It was thought that this number could be increased, given that in the new outbreaks in March alone, 184,000 individuals with probable COVID symptoms were placed under medical observation in the first two weeks of those outbreaks. was.

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The numbers did not increase, but further optimism was spurred by comments by several Chinese agencies about a possible easing of zero-Covid rules, and then came the publication of the Chinese Centers for Disease Control and Prevention (CCDC) in mid-April. ) guide that outlines home quarantine measures. These would have mitigated the economy-critical impact of people quarantining at centralized state-run facilities, even if they suffered from very mild symptoms or none at all, tested positive for Covid-19. However, these hopes were dashed again, as the CCDC reiterated the previous rules when further clarification was sought on these home-quarantine procedures. Chinese President Xi Jinping then personally reiterated that: “We must adhere to scientific accuracy, for the dynamic zero-Covid … persistence is the victory.” As it stands now, China still does not have an effective vaccine against COVID-19, nor does it have an effective anti-viral infection, and it still refuses to buy in such supplies from non-domestic suppliers. does, despite repeated offers, to make such supplies available to all major producing countries. Even before the extension of the Chengdu lockdown, which has added a total of 21 million people, 44 million people were already in lockdown in China.

At the end of July, this all translated into lower economic growth projections for China, which had a negative impact on oil prices. Two of the most consistently correct analysts on China in recent years – Eugenia Faban Victorino, head of Asia strategy for SEB, and Rory Green, TS Lombard’s head of China and Asia research – have already reported their gross for China in the year before. Domestic product growth projections were lowered. But did it again. The SEB now sees China’s economic growth this year at just 3.5 per cent and TS Lombard at just 2.5 per cent. Victorino specifically told OilPrice.com After that: “Local governments are still expected to contain domestic outbreaks as quickly as possible with extensive testing, contact tracing and quarantine policies.” He added: “[Although] With citywide lockdown to be implemented as a last resort, the policy of regular and frequent testing in major cities will keep the fear factor high in our view, and [zero-] The COVID strategy will likely translate into sporadic restrictions in the event of an outbreak of the virus in different parts of the country. Green, speaking exclusively to OilPrice.com, said: “Beijing remains strongly committed to zero-Covid, making further lockdowns almost inevitable during the remainder of 2022.” He said: “The limitations of health care, including low rates of vaccination and inadequate numbers of hospitals and staff, combined with politics from before the Q4/22 Party Congress – and Xi’s current COVID policy closely linked – Strict Covid restrictions are unlikely to end in the rest of the year.” RELATED: Record US LNG exports may not keep up in Europe

Just a week ago, the People’s Bank of China (PBOC) tried to ease negative economic pressures in several sectors with back-to-back cuts in its various policy interest rates. After surprising the market with a reduction of 10 basis points (bps) in its 1-year medium-term lending facility (1 year MLF) and its 7-day reverse repo rate (7D RRP), PBOC took the deepest cut (15). bps to 4.30 per cent). ) highlighted SEB’s Victorino on its 5th loan prime rate (5 year LPR). “The deep cut in the 5y LPR reflects the intent of policymakers to stabilize the property sector, and adjustments will proceed to average mortgage rates, given that the minimum mortgage rate is set at 20 bps below the 5y LPR,” she said. . “Nevertheless, with financials easing for months, even before the latest rate cut, PBOC is guiding to ease interbank funding through liquidity injection, [but] While the lower cost of borrowing is designed to spur credit demand, the flush liquidity situation has not yet put a floor on deteriorating confidence to coast,” she said. Of particular concern is the deteriorating state of the real sector, in the context of widespread financial disruptions in China. “Drip feed support for the real estate sector has yet to bleed and the confidence crisis in the housing market continues,” Victorino told OilPrice.com. State-owned banks doubled their estimates of overdue loans related to mortgage boycotts in the latest bank earnings report, meanwhile China’s largest state-owned bad asset management companies reported credit losses related to exposure to their assets. have reported a decline in income,” she said.

Further shocks in oil prices look more likely over the next few weeks, given that the Mid-Autumn Festival holiday began on September 10 and Golden Week (including China National Day) begins on October 1. Used to be. The Chinese government has already warned people against traveling during these upcoming major holidays.

By Simon Watkins for Oilprice.com

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