Market Watchers: What China’s Slump and Russia’s Unrest Mean for the Energy Market

The Saudi Arabian Oil Group recently stated that China and India are leading the developing economies in pushing global oil demand growth higher to over two million barrels a day (bbl/d) in 2023. Although this statement is probably accurate, Asian demand for crude remains the wildcard going into third and fourth quarter—and the erratic prices we’ve been seeing probably won’t go away anytime soon.

While China and India have been posting record crude oil imports, the overall Chinese economy has been lagging, especially in the manufacturing sector. The Chinese government has now issued two stimulus packages (including lowering interest rates) which have had a minimal positive effect.  China’s record imports have been puzzling to most traders, but they could be a result of China replenishing its storage/inventories with cheap Russian crude, rather than a sign of higher demand.

The attempted Russian revolt

Meanwhile, there’s even more uncertainty in Russia, which also may impact the global oil energy market. The Wagner Group, a Russian paramilitary organization, was ordered by its chief Yevgeny Prigozhin to march on Moscow in an apparent rebellion against the Kremlin and President Putin. The armed group got to within 120 miles of the capital. The President of Belarus brokered a deal which will allow Prigozhin to return to Belarus after he ordered his men to return to their bases. However, Prigozhin has since come out and said this was not an attempted coup but rather a “march for justice,” saying that the Russian army killed about 30 Wagner fighters on a strike in eastern Ukraine.

The world economy could breathe a sigh of relief if Putin does end up being ousted, but as we have seen time and again, replacing one despot usually means them being replaced by another.  

The world would be in a much better place if the war between Russia and Ukraine were to end, but I feel the initial rally in risk assets might be short-lived as events unfold. The China situation is another question. How will China react since it has been such a staunch ally of Russia during this whole process? The world economy still needs China to perform well.

The effects

Although the coup in Russia turned out to be a non-event, it does show that there could be cracks in leadership. Meanwhile, Russian oil production will be a critical factor for prices into the year-end and in 2024. If we see Russian production disrupted, it could ignite a major upswing in prices, especially since their current production (which is much higher than most analysts anticipated) has impacted prices negatively. When large amounts of Russian crude are being sold to Asia and India at below-market prices, as they have been, it brings down the prices of both WTI and Brent.

Still, looking forward, as of the first week of July, talk of another possible production cut from Saudi, UAE, and Russia combined will need to be monitored (which, if it takes place, would complete a total of approximately 5 MMbbl/d all in cuts). Again, what they say and what they do are usually not correlated. Also, higher U.S. interest rates and lower crude prices have triggered a downward trend in drilling rig numbers that will eventually be noted in U.S. production. As of this writing, U.S. implied gasoline demand remains very strong, as seasonally it should be into mid-July, and current supplies are near 16 million barrels below the five-year average.

One thing is for sure, prices should remain very erratic, and we’ll watch these geopolitical events and advertised OPEC+ production cuts closely.