Oil demand in China: a short-term bounce?
China has clearly been one of the success stories in handling the coronavirus. The flattening of the curve was a reflection of the nature of the tightly controlled political system. The numbers may not be completely trustworthy but even at multiples the caseload is still much lower than in other countries. As a result, the economy has picked up more quickly than elsewhere in the world.
However, the latest data for economic activity in China shows a continued split between sectors relating to heavy industry and infrastructure and the retail portion of the economy. Power generation and steel production are at high levels while passenger traffic remains low, and other indicators of local activity, such as traffic congestion, are weak.
China may be able to carry the economy forward through the industrial sector alone. But there are several red flags:
* Fiscal stimulus aimed at infrastructure is generating less efficient growth.
* Debt levels continue to climb.
* Small business – a driver of growth and employment – continues to struggle for access to capital.
* For the oil market, inadequate storage infrastructure may make further purchases for the strategic reserve difficult.
For these reasons, China may have a sluggish recovery, due as much to structural economic problems as the virus itself. This will be reflected in oil demand.
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