Economy

China's Economy May No Longer Be Wounded, Adds Risk to Oil's Rise

Douglas A. McIntyre

Published: April 1, 2016 6:46 am

Last Updated: January 13, 2020 11:17 am

The death of China’s growth means, by many measures, a drop of gross domestic product (GDP) improvement to under 6%, well below the government’s roughly 7% forecast. Purchasing managers index (PMI) contraction has partially caused this concern. However, PMI measurements, after signaling this contraction for months, have started to move positive. China is the world’s largest consumer of imported oil, moving ahead of the United States two years ago. So a better Chinese economy risks a greater hunger for crude.

The Chinese government reported that PMI rose to 50.2 in March. Anything above 50 means expansion. Services PMI reached 53.8 this month.

Of course, oil price movements rely on much more than China. Decisions by Middle East nations and Russia can flood the market with supply or choke it off. Many of these nations have seen their treasuries drained because oil prices are so low. Additionally, the fracking industry in the United States has been partially destroyed by lower oil, which has curtailed its production.

On the demand side, there are signs that U.S. drivers have begun to consume more gasoline, because of low prices and improvements in employment. Europe also has recovered mostly from the Great Recession. Refinery production can throw prices higher or lower. This list of effects on demand means no single thing is likely to move a hunger for oil.

To some degree, oil prices also move due to rumors and speculation. Some experts blame that for the rise of crude from $29 three months ago to nearly $40 recently. China’s economy may become part of that rumor mill. Beyond that, some of the rumored demand may be real.