This Week In Energy: The Growing Threat From China
Oil prices dropped to new six-year lows this week as WTI dipped below $42 per barrel. The big piece of news this week was the currency depreciation in China. It seems we are talking more and more these days about the warning signs coming from China’s economy and how the trouble there is depressing oil prices. In June and July, it was the stock market crash, and this week it is the currency depreciation. The yuan dropped 3 percent by the end of the week after stabilizingat 6.3975 per dollar.
The move to devalue the yuan was aimed at providing a jolt to Chinese exports. But a more pessimistic take on the move is that China’s economy is starting to raise some red flags. The grip that the central government has had on the economy appears to be slipping. The Chinese government has carefully crafted a reputation of control, backed up by two decades of phenomenal growth.
Presiding over such a period of unprecedented economic expansion has created an aura of invincibility and inevitability. But the economy is starting to appear fragile, with high levels of provincial debt, an inflated stock market, and growing unease about environmental pollution that could force the government to pullback on growth. To make matters worse, the port city of Tianjin suffered a massive explosion this week that killed dozens of people and spewed toxic chemicals into the air. The incident is emblematic of China’s growth-at-all-costs model, which is starting to run its course as people become fed up.
Related: Energy Investors May Have A Long Wait Ahead
That is the backdrop for the currency move this week, and the devaluation sent a shock through the oil markets. Oil demand has been growing, but not quick enough to soak up extra crude supplies. A weaker Chinese currency will make oil comparatively more expensive, so could knock Chinese oil demand down a bit, a bearish development for oil.
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