TOCOM Energy

Markets continue to sway in reaction to macro economic indicators

Wu Hai

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June 22, 2023 5 min read

The oil markets continue to be volatile with major crude oil benchmarks breaking to the upside of the recent range on Wednesday. Prices were elevated after the EU announced a new package of sanctions against Russia, which included a shipping clampdown that could curb imports.

On the demand side, Markets continue to focus on economic data from China and the United States, the two most important markets in helping drive economic growth and energy demand.

China’s demand outlook is crucial for the global market in the second half of the year, given that the bulk of global demand growth is expected to be driven by China. Although recent data shows that China’s post-COVID economic reopening has been much softer than expected,China’s  crude demand remains healthy, particularly from ChinaOil, whose buying spree in the market this month together with opec cuts has helped lift the Middle East benchmark Dubai above Brent.

Fresh figure shows that China’s housing construction has fallen 23% in the first five months of the year, compared with the same months last year, heavily weighing on oil prices early in the week.

The housing boom in the past two decades made real estate a preferred investment class for Chinese households. Furthermore, for local governments, real estate has become an important source of fiscal revenue. But the sector went into a slump in 2022, the problem is a huge debt load. To prevent the housing downturn from further dragging down economic growth,overall interest rates are likely to decline as China will need to keep rates low to manage debt levels. However, slow stimulus rollout is adding to concerns over the economy, with only modest rate cuts announced so far.

The debt burden does not only exist in China and the United States, but is also a global problem arising from current currency system. Global debt, according to a recent report by the Institute for International Finance, amounted to nearly $300 trillion in 2021, equal to 356 percent of global GDP.

The central bank is generally able to control the economy through easing and tightening in a small cycle. But over time, each bottom and top of the cycle finishes with more debt than the previous cycle. This is due to the weakness of modern monetary system.

The goal of printing money is to reduce debt burdens, however, when the creation of money sufficiently hurts the actual and prospective returns of cash and debt assets, it drives flows out of those assets and into inflation-hedge assets like crude oil or other currencies.