Oil Price Rally Unravels On China’s Underwhelming GDP Growth Target

Oil prices pulled back on Monday morning after China set a GDP growth target of “around 5%” for 2023, lower than last year’s target of 5.5% and also lower than the average forecast of 5.24% by a cross-section of economic experts. 

Last year, China’s GDP expanded by just 3% but experts were optimistic that this year’s target could be set as high as 6% after the country relaxed its strict covid-19 rules.

Additionally, China set a goal of 3% for the consumer price index (CPI), with Beijing keen to maintain tight price controls on energy and agricultural commodities.

Oil prices have also come under pressure as investors cautiously await U.S. Federal Reserve Chair Jerome Powell’s testimony this week.

“Crude remains in a tug-of-war between optimism over Chinese reopening and nervousness over a hawkish Fed hurting the U.S. economy,” Vandana Hari, founder of oil market analysis provider Vanda Insights, has told Reuters.

The pullback reverses last week’s gain after both WTI and Brent crude futures jumped more than 4% on Friday after China’s factory output beat forecasts and reports emerged that the UAE will not exit OPEC as earlier feared.

Oil prices fell more than $2/bbl early Friday following a Wall Street Journal report that the United Arab Emirates planned to cancel its OPEC membership so that it could pump more oil, a move that would lower OPEC’s power in global markets. However, the UAE gave a speedy response to the WSJ report and denied having any intention of leaving OPEC, leading to an oil price rally.

Weak Commodities Outlook

Commodity bulls will be worried that the economic numbers presented by Beijing give little hope that the commodities markets will receive the massive boost they received before the pandemic when Beijing drove markets for materials like copper and iron ore to record highs.

Local government bond sales in China are regarded as the backbone of infrastructure investment that drives much of the country’s raw materials demand. Unfortunately, the target for this sector was modest too, suggesting that Beijing aims to strike a balance between supporting the economy and while also trying to prevent runaway commodities inflation.

Local governments will be allowed to sell 3.8 trillion yuan ($550 billion) of new special bonds, more than last year’s target of 3.8 trillion yuan but lower than last year’s actual issuance of 4.04 trillion yuan.

According to Bloomberg Economics, the government’s spending plans will widen the budget deficit, including local government bonds, to 5.9%, compared to 5.8% of GDP in 2022, which is higher than expected.

That said, some corners of China’s sprawling commodity markets are expected to maintain strong growth. China’s steel consumption, which accounts for the lion’s share of infrastructure spending, is expected to remain high thanks to the government’s heightened spending on public works to aid in economic recovery and also alleviate the crisis in the real estate industry. China’s real estate market has nosedived over the past two years after the government cracked down on developers due to their high reliance on debt. China’s property market contributes a quarter of China’s GDP, and a sharp slowdown by the sector has been a major drag on the economy.

China’s fossil fuel sector is also expected to continue expanding at a brisk clip with the country trying to lower its reliance on external markets. Stung by growing power outages in recent years, Beijing has pushed for the expansion of coal and oil production, with coal output growing 10% last year to 4.5 billion tons, crude oil rose above 200 million tons for the first time since 2015, while natural gas also hit an all-time high thus helping to cut China’s reliance on pricey energy imports.

But China is not the only guilty party when it comes to expanding the production of the dirtiest fossil fuel at a time when the world is desperately trying to achieve climate goals. After all, the global coal sector has seen a major resurgence after Russia invaded Ukraine: according to a report by the Observer Research Foundation, energy supply disruptions triggered by Russia’s war on Ukraine left coal as the only option for dispatchable and affordable power in much of Europe, including the tough markets of Western Europe and North America that have explicit policies to phase out coal.

According to the Washington Post, coal mines and power plants that closed 10 years ago have begun to be repaired in Germany. In what industry observers have dubbed a “spring” for Germany’s coal-fired power plants, the country is expected to burn at least 100,000 tons of coal per month in winter. That’s a big U-turn considering that Germany’s goal had been to phase out all coal-generated electricity by 2038. Other European countries such as Austria, Poland, the Netherlands, and Greece have also started restarting coal plants.

However, China’s renewable energy sector is expected to continue being the biggest winner, with Beijing pushing ahead with massive solar and wind projects as well as power grid upgrades, meaning green metals such as copper and aluminum will continue being in high demand.

Over the past decade, there’s been a seismic shift in investment trends with Europe no longer the epicenter of clean energy investments after losing that spot to China. Indeed, BNEF says that China spent $546 billion on renewables in 2022, more than triple the European Union’s total spend of $180 billion and the United States’ total spend of $141 billion. Germany retained its third place; France climbed to fourth while the UK dropped one place to fifth.