China Could Cause The Next Massive Crash In Oil Prices
- China has been one of the main drivers of the 2000-2014 commodities supercycle
- Slower economic growth and a huge debt bubble pose a tremendous risk to oil markets
- China’s Evergrande crisis shows the fragility of the Chinese debt market
Given the extreme disconnect between China’s huge economy-driven oil and gas needs and its minimal level of domestic oil and gas reserves, the country’s influence over oil prices has long been profound. As a result of this imbalance, China almost alone created the 2000-2014 commodities ‘supercycle’, characterized by consistently rising price trends for all commodities that are used in a booming manufacturing and infrastructure environment. This was a product largely of the 8 percent-plus annual GDP growth recorded by China over that period, with many spikes well above 10 percent and only a relatively short move down in economic growth at the onset of the Great Financial Crisis. Aside from huge quantities of imported oil and gas, this massive economic growth was fuelled by enormous debt piled up but then hidden away in various financial mechanisms that China believed it could simply pay off eventually through its rapid economic growth. Developments in the last week or so hint that both of these bubbles may be set to burst, taking the big bid in oil out of the market.
“Despite some easing in the energy market, downside risks to growth persist, and we continue to expect GDP growth to ease to 5.2 percent in 2022 from an estimated 8.2 percent growth in 2021,” Eugenia Fabon Victorino, head of Asia Strategy for SEB, in Singapore, told OilPrice.com last week. “Easing in financial conditions will not spare the property sector from further pains, and bond defaults will continue to test investors’ nerves,” she said.
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