Lack of clarity on China’s economic stimulus plans sent oil futures tumbling on Monday, as traders adopted a wait and see approach to the impact of rising tensions in the Middle East.
At 7:18am EDT, the Brent front-month futures contract was down 2.34% or $1.85 to $77.19 per barrel, while the West Texas Intermediate traded at $73.66, down 2.50% or $1.89 as lower crude demand weighed on trading sentiment.
Speaking at a press conference on Saturday, Chinese Finance Minister Lan Fo’an reaffirmed Beijing’s commitment to economic stimulus measures but stopped short of providing a clear number on how much the government would spend in bringing this about.
The Chinese central bank’s planned liquidity injection of 1 trillion yuan ($141.2 billion) to meet the government’s commitment of achieving its 5% GDP growth target is already in public domain.
But the minister said China may also help out its struggling local governments by increasing the debt limit further. Such debt restructuring could total 3 trillion yuan in 2025 but the figure is yet to be officially confirmed.
Fo’an also said the government would issue “special bonds” to support bank capitalization, and deploy both bonds and conducive tax measures to stabilize the bond market. The minister added that Beijing has “considerable space” for borrowing for future stimulus measures, according to AP.
However, the lack of a clear timeline on measures tackling structural issues in the wider economy, especially relatively weak consumer confidence, left the oil market unimpressed.
The vague announcement followed China’s Golden Week holiday (October 1–7) which temporarily upped fuel demand. But that has since reverted to lower levels seen over the past few months.
Rystad Energy estimates that China’s oil demand growth is now expected to slow significantly, contributing only 108,000 barrels per day in 2024.
Gasoline demand has also plateaued as the market share of electric vehicles has exceeded 50%, and distillate demand has dropped by 100,000 bpd due to economic challenges and the rise of LNG trucks, the industry research outfit noted.
With much of China’s current demand being driven by petrochemicals and aviation in the main, and lower global demand in general, oil futures slumped in September to their lowest levels since December 2021, with Brent falling as low as $70.
However, an attack on Israel by Iran on October 1 raised the market risk premium considerably and drove Brent futures back towards $80 per barrel.
Iran said it had attacked Israel in response to its “aggressive acts,” including the killing of Hezbollah leader Hassan Nasrallah in Lebanon. In response, Israeli Prime Minister Benjamin Netanyahu said Iran had “made a big mistake and will pay for it”.
This may be a coded warning that Israel will go after in Iran’s oil facilities. According to industry data aggregator and research firm Kpler, Iran exported 1.194 million barrels per day of crude oil and gas condensate in spring 2023, a figure that rose to a five-year high of 1.65 million bpd in the first five months of 2024.
So, the industry is an obvious target for Israel, should it choose to retaliate, as various media reports (e.g. Axios) have speculated. However, the extent of the market impact depends on the chosen targets, scale of a possible attack and whether or not it spills over into a wider regional war that causes supply outages.
With a market that is currently looking like it will be oversupplied in Q4 2024 and Q1 2025, any absence of an impact to energy infrastructure as well as clear and substantial Chinese stimulus moves would imply lower oil prices to the end of the year.