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By Chris Tedder, Research Analyst, Forex.com
Last year China transitioned from a nation focused on controlling inflation to one attempting to avoid a hard landing. Beijing's extremely tight policy stance aimed at controlling inflation combined with weak levels of demand from Europe to bring China's GDP growth rate from above 9% to an expected 7.5-8% this year. This has caused some investors to question the ability of the world's second largest economy to avoid a hard landing, which would have implications for its demand for oil.
However, we are of the view that China will avoid a hard landing and should remain a strong source of demand for oil. Whilst we are seeing relatively soft growth figures from China - when compared with previous years - they are broadly in line with what we expected to see as a result of Beijing's tight policy stance aimed at controlling inflation. The government also has a war-chest of options when it comes to simulating growth, some of which Beijing has already used. Hence, we expect to see the government continue to ease its tight policy stance, in turn stimulating growth and demand for oil.
Some recent figures from China are already painting a brighter picture for domestic growth. Despite a poor unofficial figure from HSBC, manufacturing PMI for March printed much better than the market was expecting and comfortably in expansion territory at 53.1. There was also a strong showing from the non-manufacturing sectors, with March's PMI increasing to 58.0 from 57.3. We are taking these numbers to mean business managers in China are becoming more optimistic about the outlook for the domestic economy as they anticipate more policy easing from Beijing.
Furthermore, if you believe the FOMC, then the outlook for the US economy is good. Whilst not all Fed/FOMC members agree with this point of view - Fed Chairman Bernanke has previously stated the decline the US unemployment is not sustainable - the overall take-out from officials in the US is the growth situation does not warrant more quantitative easing. Hence, the continuing recovery in the US may act as a support for oil prices.
Nevertheless, the near-term fate of oil is likely going to be decided by the supply concerns stemming from the Middle East. A resolution in the Iran situation would likely bring the oil price down from current levels, but we suspect the improving international growth outlook, especially in regard to the US and China, will act as a floor for oil prices once supply concerns diminish.
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