The Crude Reality: oil prices are back in static territory!

 

As the prevailing tensions in the Middle East gradually ease, the short-lived spike in oil prices appears to be dying  down, leaving the oil markets back at the mercy of the usual factors. 

With the two successive assassinations of key figures, a few hours apart, in the conflict in the Middle East, Israel dramatically raised the military stakes on Tuesday. Anticipating a concerted, perhaps multi-pronged counter-attack, the Jewish state braced itself for the worst-case scenario, despite the the 'iron-clad' backing from its main ally, the US. 

Judging by the diminishing tempo by Friday, however, it looks like the diplomatic channels that have gone into overdrive may have succeeded in keeping the warring factions apart, before getting into a catastrophic war - at least, for now.

Analysts, meanwhile,  are surprised at the fact that even in the midst of a looming major conflict, the spike in the oil price was pretty modest; that means the existing worries in the markets still have the potential to eclipse even a significant geopolitical event in the region that matters most for the oil markets. 

Among those factors, the state of the Chinese economy stands distinctly prominent - once again: its manufacturing PMI index that reflects the health of the manufacturing sector has shrunk again in July, recording just 49.4%,  below the figure in June - 49.5%; the threshold, according to China's National Bureau of Statistics, is 50%.

It goes without saying the significance of China in determining the current oil prices: not only is it the world's second largest economy, but it is also the world's largest importer of crude oil and the world's second largest consumer after the US.

Although the Western media highlights the headwinds in the property sector as the biggest threat to the Chinese economy, there are a few more major factors posing even a bigger problem, judging by the available data. 

Of course, the property sector used to drive the Chinese growth engine for decades. It, however, is facing a crisis as never before: developer-debt, falling sales, coupled with falling property prices and consumer confidence on decline have contributed to a perfect storm in the Chinese economy. 

Although the Chinese authorities downplay the severity of the crisis, it certainly is not a storm in a tea cup. 

In addition, at demographic level, the aging population and shrinking labour force in proportion, have led to a sharp rise in dependency ratios; in this context, the impact on the pension systems and labour supply cause ripple effect in many other sectors of the Chinese economy.

As far as the geopolitical tensions are concerned, China's troubled relations with its immediate neighbours such as India, Taiwan and even the Philippines, meanwhile, hardly help alleviate the impact on the economy, when the growing friction dampens the business sentiment of the investors; it has already led to supply chain disruptions,  increased costs and above all, the never-ending uncertainty for businesses.

Furthermore, China's ambition to turn its export-oriented economy to a consumption-driven economy is proving to be much more challenging than it first hoped that it would, in the presence of other key factors; the transition is neither easy nor pragmatic as long as income inequality, lack of both growth and confidence in the domestic market remain illusive, despite the government's best efforts to root out endemic, bureaucratic corruption and rural poverty.

The global economy in general and Chinese economy, in particular, have been causing friction against the upward movement of the oil prices. It accounts for the failure to lift the prices up, despite the falling US crude stocks that used to push the prices up, up until recently. 

All in all, if the volatility in the Middle East does not change dramatically in the next few days, the price of crude oil will remain in the static state for a few more months. Falling gas prices, in this context, hardly help the commodity to change the status quo.