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China Manufacturing PMI Contracts, but Lunar New Year Travel Critical for Outlook

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

China Manufacturing PMI Contracts, but Lunar New Year Travel Critical for Outlook
 
Harry Altham
Energy Analyst, EMEA & Asia

Brent crude has dropped beneath $82/bbl, despite continuing fallout from the Red Sea crisis. Following yesterday’s report on the consequences for journey times, we trawled through freight data to see how our analysis lined up and found our calculated journey times accurately tied in with those undertaken by vessels over the past month. The extension of journey times is particularly damaging for Black Sea origin cargoes; it has been reported that Kazakh crude is now travelling to Asia around Africa, more than doubling the journey through the Red Sea that was possible until recent weeks. 

chinese data a cause for concern
Brent’s near 1% drop this morning has been fuelled by weak manufacturing data from China; though official manufacturing PMI rose by two percentage points from December to 49.2, the reading reflected a fourth straight monthly contraction in manufacturing activity. Though falling in line with analyst expectations, the numbers reflect a weakness in the Chinese economy that could spur the Central Bank to cut rates in the first half of this year as a means to spur greater domestic demand. Last week, the Central Bank announced a cut to the reserve ratio requirement, to the tune of an additional $140bn of liquidity, as the country suffers from fragile consumer confidence – not helped this week by the Hong Kong liquidation order on property giant Evergrande. 
This is a sensitive issue for oil prices because 25%-30% of roughly 1.3M bbd in global demand growth in 2024 is currently expected to come from China, meaning a weaker-than-forecast economy could tilt the fundamental balances towards a supply surplus. This will be a real concern to price driven OPEC countries; earlier this month, Saudi Arabia cut its Official Selling Price (OSP) for Arab Light to Asia by $2/bbl to $1.50 above Oman / Dubai for February to compete against cheaper regional grades and could struggle to secure any further output cut at the next OPEC meeting at the end of next month. 
That said, Chinese oil demand growth in 2024 is not expected to be primarily driven by industrial consumption; the world will look most closely at the globe’s largest annual human migration; the Lunar New Year Celebrations. This is because transport fuels are expected to account for up to 80% of demand growth, with Asian refiners pinning their hopes on strong Chinese jet fuel markets this year. A y/y increase in journey statistics would be a clear indication that China’s propensity to spend on travel is strong (much as it has been across the rest of the world post-COVID), and could provide some support to markets as February continues. 
Saudi Arabia has reversed its decision to increase productive capacity to 13M bbd, stating instead that it would keep capacity at 12M bbd having cited uncertainty over the need for spare capacity. The order to Aramco came from the Saudi Energy Ministry and is thought to have been directed from some of the Kingdom’s most senior officials. The move comes despite bullish OPEC reports over global demand peaking until 2045 but does fall against a backdrop of resoundingly strong non-OPEC supply capacity increases. Latin America alone could produce an additional 3.5M-4M bbd by 2030 (excluding unpredictable Venezuela, with the world’s largest proven oil reserves at 304bn barrels, or 8.2 years of global supply). 
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Source: IEA, StoneX
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