China’s zero-Covid adjustments are a false flag for oil markets

The bullish reaction from several of the world’s major stock markets to the news that China had “easing” its economy-damaging “zero-Covid” policy was misplaced by any measure. Overall, first, China hasn’t relaxed its zero-Covid at all, it’s just made some minor adjustments. Second, these minor adjustments will worsen the net effect of its zero-Covid policy, as it will lead to an increase in Covid-19 cases, given China’s complete lack of any effective vaccination or treatment for the disease. Third, it is China’s continued economic slowdown and not its economic dynamism that should be welcomed by the developed market economies of the world. Such a slowdown will reduce China’s huge demand for oil and gas and it is soaring energy prices that have led to the toxic combination of high inflation and high interest rates that threatens recession in several major world economies. China’s zero-Covid policy relies on imposing ultra-tight lockdowns introduced in entire cities as soon as a relatively small number of Covid-19 cases are identified. On November 11, the Chinese government unveiled 20 minor edits to the zero-Covid policy in place for about three years. One of those changes is that travelers from overseas will need a negative PCR test within 48 hours of boarding a flight to China instead of two. Another is that foreign travelers will have to quarantine for eight days, instead of 10, and another is that in China people considered “close contacts of close contacts” of Covid-19 carriers are not will no longer need to quarantine. The new guidelines also prohibit mass testing unless “it is not known how infections are spreading” in an area. That said, on the same day these announcements were made, Beijing municipal authorities were requiring many city residents to be tested daily, more often than in recent weeks.

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The central problem with China’s latest approach to Covid-19 is the same as with most half measures: that is, they only make the problem worse. In this example, any relaxation of China’s zero-Covid policy will lead to a marked increase in Covid-19 cases because the country still does not have an effective vaccine against the disease or any variant of it. This is despite continued offers from all major vaccine-producing countries to make these supplies available. Chinese President Xi Jinping has personally defended his country’s one-sided approach to the fight against Covid-19, repeatedly characterizing it in nationalist and Chinese Communist Party terms. “We must adhere to scientific precision, zero-Covid dynamics… Perseverance is victory,” he said. said in April. “Zero-Covid is a people’s war to stop the spread of the virus” he added. Moreover, this increase in cases will lead to more deaths, because China also lacks an effective post-infection antiviral, and it still refuses to buy such supplies from foreign suppliers, again despite offers. in the works of several Western countries to make such antivirals and post-infection treatments available in China.

The clear support President Xi garnered at the recent 20th Party Congress to be re-elected as General Secretary of the Communist Party of China for a third term almost certainly means that China’s approach to Covid-19 will not change. significantly anytime soon. “China’s commitment to its aggressive COVID-suppression strategy remains the strongest impediment to growth, and official statements before and during the Party Congress have trumpeted that the policy is most appropriate for the country,” said Eugenia Fabon Victorino, head of Asia strategy for SEB. “In 2020, the Chinese economy managed a rapid recovery from the first wave of infections, as mobility restrictions succeeded in limiting transmissions to a limited number of regions, but increasingly contagious virus strains led to a substantial increase in regions reporting new Covid cases daily. ,” she added. Indeed, just over a month ago, even before China’s latest Covid-19 policy adjustments, 26 out of 31 regions had experienced severe outbreaks. last week, China’s National Health Commission reported 23,276 new daily Covid-19 infections.

In terms of specific negative ramifications for China’s economic growth, the key Purchasing Managers’ Index (PMI) for factory activity unexpectedly fell in October to 49.2, a drop of 0. 9 from the previous month, and indicative of an outright contraction. With that in mind, China’s crude oil imports for the first three quarters of the year fell 4.3% year-on-year, marking the first annual decline for the period since at least 2014. As at the end of the first half This year, then, the economic outlook for China was already deteriorating more than expected, with SEB’s Victorino having already lowered its GDP growth estimate for China earlier in the year to just 3.5%.

A significant drop in oil prices may not be what oil producing companies want, but it is certainly what the global economy needs, and especially the economies of developed countries. Since the end of the third quarter of last year, global investors across all asset classes, including commodities, have been eyeing a toxic combination of runaway inflation fueled in large part by soaring energy costs and repeated sharp increases in interest rates to counter this trend. . At the same time, there are growing fears that higher interest rates for longer could tip developed market economies into recession. Quarter-over-quarter U.S. economic growth fell from 3.7% in the first quarter of 2022 to 1.8% in the second quarter and the same in the third quarter, as inflation hit highs of around 40 years by more than 8% and the federal funds rate was raised to 3.75. -4.00 percent. German economic growth saw the same pattern of decline, falling from 3.6% in Q1 to 1.7% in Q2 and 1.2% in Q3, as did that of the UK, from 10.9% in Q1 at 4.4% in Q2 and 2.4% in Q3.

Why did this toxic inflation-interest rate-growth cocktail begin towards the end of the third quarter of last year? This is mainly because the end of September saw the public release of the first indications that Russia had specific plans for a full invasion of Ukraine. These were reports from multiple sources, based around the observations of US intelligence officers highly unusual Russian military movements on the Ukrainian border after the conclusion of the joint Russian-Belarusian military exercises that had taken place. It was at this time that the well-informed players in the oil market began to buy oil massively. Before that, oil regularly traded around US$65 per barrel of Brent. This level reflected the equilibrium price which took into account the already evident weakening of demand from China, which had overtook the United States as the world’s largest annual crude importer of crude oil in 2017 and had been the world’s supporting bid for oil since its rapid economic expansion began in the 1990s. As this Russian-Ukrainian war bounty wanes as Europe continues to make arrangements to replace energy from Russia with energy from other sources, as it will, this level of US$65 a barrel will likely be the price basis point oil, up or down from then.

It should be noted that this level is part of the workforce ‘Trump oil price range‘ from 40 to 75 USD per barrel of Brent, as analyzed in depth in my previous book on world oil markets. Any price above US$35 a barrel is enough for the majority of US shale oil producers to make a decent profit. Any price above US$75 a barrel begins to heighten US Presidents’ fears of exactly the kind of toxic equation of rising energy prices leading to higher inflation leading to weaker growth leading to election disaster. as we have seen since September of last year.

By Simon Watkins for

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