China’s light at the end of the tunnel. When I think about China and its effect on oil prices over the years, I still find it a bit funny how the oil market and traders react to this far away land.
In the early part of this decade when I warned of a massive demand surge from China and the Asian economies, I was met with a lot of skepticism. There was this emotional bias against China and some preconceived notions about the country that made it hard for many to believe that China would be a major factor in anything let alone a major factor in the oil or commodity markets. Part of that was the perception of inefficiency in the Chinese economy and the fact that the Asian financial crisis was still fresh in the minds of many market players. All of that changed and the world jumped onto the Chinese bandwagon and rode oil to those all time record highs. The Chinese economy in some people’s minds had grown independent from the rest of the world and would continue to drive oil and commodities higher for ever. Of course that all changed when the oil market broke. Part of the reason it fell was of course because the dramatically falling demand in China. So it was no surprise to me when it was reported that the Chinese economy grew at its slowest rate on record in the first quarter of this year. We did not need the GDP report because I could see this in the oil market long before it was an accepted fact by many market watchers.
Still within the data there is hope that perhaps the Chinese economy may improve in the near future. That hope in part is being nurtured by China’s 4 trillion yuan or $585 billion dollar stimulus package. The oil market which is having a hard time staying away from $50 a barrel is looking at the China GDP data as the barrel half filled. In a market trying to find direction this market is grasping at anything other than the oil inventories to make a move. The EIA report that crude supply is at the highest level since 1990 with demand at the lowest level since 1999 yet it seems the market only halfway cares. Refinery runs are pathetic yet products continue to hang in there. This market seems to have found a home in this area and may go sideways for awhile. In fact today perhaps the most excitement will be big moves driven by the options expiration.