Oil prices rose for a second day today after a downward trend that prevailed throughout the past week. Both Brent and WTI crudes rose by about 0.3%.
The recovery in oil prices comes amid more positive signs about the ability of the Chinese economy to recover and the effectiveness of support packages.
\/This in turn comes in light of the November manufacturing and services PMI surveys, in addition to the introduction of plans that will boost domestic spending and provide support to the real estate market.
Despite slower-than-expected growth in services activities in China last month, sentiment in this sector rose to its highest level since last April, according to the Caixin/S&P Global report. While the recovery in corporate sentiment is driven by optimism about better economic conditions and the effectiveness of government support in boosting sales, risks to international trade and increased competition remain a concern for other companies.
The narrative is similar in the manufacturing sector, as seen in yesterday’s PMI report for the sector. Sentiment there rose to its highest level since March. Manufacturing activity also accelerated faster than expected.
More structural overhaul plans have been floated that could boost the local economy. Some cities are considering reforming the household registration system, known as hukou. The reform is primarily aimed at supporting the real estate sector, which is suffering from a persistent downturn in housing prices, by giving urban homebuyers access to vital social, health and education benefits. Migrants from rural areas who do not have “residency” in the cities cannot access these benefits. However, these plans may increase their desire to buy property in cities in order to access these benefits.
However, according to The Wall Street Journal, these plans are unlikely to boost the real estate market in general, as the markets of major cities – the subject of these reforms – are more resilient than smaller ones.
However, the impact of these reforms may be positively reflected by reviving consumer spending with greater abundance of social benefits, according to The Journal, which also said in its reporting of these plans that they will be one of the most important initiatives launched by China in years.
Despite all this, markets may become more optimistic about the future of domestic demand in China, which will enhance the growth needed to lift oil prices from their low levels. However, uncertainty is evident in the future of Chinese exports, which are counted on to drive the economy in light of the weak domestic demand environment so far, and these risks around global trade represent one of the most prominent negative factors facing crude prices today.
But despite this pessimism about the expected trade wars with Donald Trump’s return to the White House next January, the door is still open to de-escalation through negotiations between the two economic poles. The massive tariffs threatened by Trump may not be enforced, given the interdependence of the two economies in so many vital areas.
This week, after the U.S. Commerce Department banned the export of advanced microchips to 140 Chinese companies, China responded by blocking the export of several minerals critical to the chip, electronics, battery, and military industries. Losing them could pose a threat to the U.S. economy and national security.
The supply of these minerals will be a significant and weighty factor for China in potential trade negotiations. The potential impact on the U.S. economy, including inflation, medium-term growth weakness, and damage to the agricultural sector, is would likely make Trump more hesitant.
Therefore, an agreement between Trump and China on favorable trade terms for the United States and less severe obstacles to the flow of trade between the two countries than are currently threatened, could ease downward pressure on crude prices in the coming months.
Aside from China, this week hosts a series of vital labor market data in the United States. While a better-than-expected flow of data – as seen in yesterday’s JOLTS report – would reinforce the positive outlook for the US economy which could also help to propel crude prices.
