The oil price rally took a breather yesterday after three straight days of gains. Stagflation worries percolated into the energy complex as market players fretted over slowing growth and higher prices. Better said, it is finally dawning on traders that the current price environment may act as a drag on the global economy. Brent retreated from multi-year highs, albeit only slightly. The European crude benchmark fell 23 cts to finish at $83.42/bbl while WTI ended 12 cts higher to score back-to-back settlements above $80/bbl.

Meanwhile, as expected, the IMF issued a downbeat economic outlook as supply-chain constraints and rising inflationary pressures threatened the global recovery. The Washington-based lender trimmed its forecast for world economic growth in 2021 to 5.9% from 6% back in July. Yet the modest headline revision masks major downgrades, chief among which was the US growth forecast which was shaved by a whole percentage point to 6%. It left a 2022 global growth forecast unchanged at 4.9%. The doomsayers are the IMF also warned that the gaps in expected recoveries between advanced economies and low-income countries is widening. This is largely due to the large disparities in vaccine access. Finally, it called on central banks to ready themselves to act quickly on rising inflation.  All in all, growth and inflation worries are weighing on sentiment. This is putting the brakes on rallying energy prices although the lull in upside potential is expected to be short-lived.

China losing its appetite

These are troubling times for China. A severe energy crisis is gripping the country. Consequently, factory activity unexpectedly shrank in September, according to an official PMI survey. What’s more, inflation is soaring. China’s September inflation data is due out tomorrow and is expected to show consumer and producer prices extended their run to multi-year highs. Another worrying piece of data is last month’s 20% slump in Chinese car sales from a year earlier. And then there are the worsening conditions in the country’s property market. Embattled property giant Evergrande recently missed the third bond repayment in as many weeks. The crisis has since spread to rival firms which are now scrambling to push back repayment deadlines amid a liquidity crunch. Many now surmise that the fast-spreading contagion in China’s property sector is a sign of wider malaise.

And the country’s economic woes show no sign of easing. Initial data point to sluggish retail sales during the Golden Week Holiday which took place during the first week of October. What’s more, air passenger traffic over the holiday period fell 19.6% from 2020 levels, the regulator’s data showed. The current slowdown in consumption poses a downside risk to China’s economic growth. Needless to say, this spells bad news for the oil demand picture.

And sure enough, latest available figures suggest China’s economic troubles are putting pressure on its crude imports. The world‘s top-oil importing nation is showing renewed signs of weakness after undergoing a mini-revival in August. China’s crude oil imports declined to an average of 9.99 mbpd in September from 10.49 mbpd in August, according to official data. Alongside economic headwinds, the pullback in imports came as China drew on its commercial and strategic reserves in a bid to counter rising prices. Beijing made a historic decision last month to sell off some of the oil it has been stockpiling in a strategic reserve for years as oil prices surged past $70/bbl. All the while, imports were also depressed by the stricter oversight on teapots imports following the clampdown on the illegal quota trade.

Looking ahead to the year-end period, the weakness in China’s crude imports is well positioned to be sustained. At over $80/bbl, crude has become too expensive for Chinese refiners. The current price point will act as a drag on its foreign crude purchases while simultaneously incentivising a further drawdown in domestic oil stocks. At the same time, China is turning to other fuels as it scrambles to ensure enough energy supplies for the winter. Authorities recently ordered more than 70 coal mines in Inner Mongolia to ramp up production by nearly 100 million tonnes or 10%. This is likely to cut into oil demand.

Meanwhile, China’s independent refineries are expected to keep their crude throughput to a minimum in the near-term as power rationing hinders their comeback. In a similar vein, efforts on cutting energy consumption may well translate into a reduction in the next round of crude import quota allocation, likely to be issued later this month. Such an eventuality will inevitably take its toll on the country’s intake of foreign crude. The message is clear: those betting on a significant rebound in China’s crude imports in the final quarter of 2021 are at high risk of being left red-faced and out of pocket.