Over the past decade, China has become the primary driving force behind the demand of any commodity. The manufacturing statistics of China therefore create a significant impact on the global oil prices. China makes up 11.4 percent of the total world oil demand and as a result, its manufacturing numbers are very significant in setting the global oil prices.

China Demands For Oil

Recently, much of China’s demand for oil has been routed to Russia with long-term agreements developed between the two countries for the utilization of Russia’s oil and gas reserves. However currently, most of the oil in China comes from Saudi Arabia and other Middle Eastern nations and hence, China’s demand impacts the OPEC prices in particular and the global oil prices in general.

Chinese manufacturing numbers were released by the official sources in China today. When markets opened in Singapore this morning, the disappointing Chinese manufacturing data hit Brent Crude and it hit a low of $101.66. The same happened a couple of weeks ago when the HSBC Markit predicted the June Manufacturing PMI of China to be 48.3. At that time, prices rallied slightly below $100.

China’s National Bureau of Statistics has reported a manufacturing PMI of 50.1 (May: 50.8) for June 2013, along with a production index of 52 (May: 53.3) and a raw materials inventory index of 47.4 (May: 47.6).

Table 1: PMI and Other Production Indices, June 2012 to June 2013

China PMI
Source: National Bureau of Statistics of China

Furthermore, manufacturing statistics has released a flash note on the seasonally adjusted PMI of China and reported it to be 48.2.

Figure 1: HSBC China Manufacturing PMI

Source: Markit, HSBC
Source: Markit, HSBC

China’s Slowdown In Economy

The slowdown in Chinese economy was an expected one and so the net impact on oil prices was not a significant one. The prices had already been adusted to reflect the anticipated decline in Chinese production and there was no wild drop in the market. This relationship can be seen in the historical trend where the prices of oil adjust for changes in Chinese PMI before the final numbers are released at the end of a month.

Figure 2: Chinese Manufacturing PMI and Brent Crude Oil Prices, June 2012 to June 2013

Source: China National Bureau of Statistics, Bloomberg
Source: China National Bureau of Statistics, Bloomberg

There is a lagging positive relationship between Chinese production and Brent oil prices, where positive results of China result in increase in oil prices and negative news about China brings down the oil prices.

We can expect this relationship to continue in the future as the Chinese demand for petroleum products makes up a bigger and bigger chunk of the global demand. The demand has grown at an astonishing 7.4 percent in the last ten years and it is expected to grow further, though at a slower pace in the cooling economy. The slowdown in economy and the impact of reduction in global demand affects the largely export-dependant Chinese economy and its demand for petroleum products.

Given the current status, we can expect some further reductions in oil prices in the future, owing to Chinese slowdown.