China, the US & Oil

OPEC is just one lever in global energy pricing in 2023

Fifty years after the 1973 Oil Crisis, OPEC has found new life as a balancing force in geopolitics. As a consequence of its newfound energy self-sufficiency, the United States has been downgrading its relationships with the oil-producing nations of the Middle East, Latin America, and Africa. The world’s second largest economy however, is far more dependent on other countries for its energy needs, and that in turn is reflected in China’s expanding foreign policy objectives.

As a result of the OPEC announcement last weekend, markets reacted with higher prices. The increase might not be sustainable. In 2001 and 2008 oil prices continued to decline after OPEC production cuts. According the the EIA, between 1998 and 2016, the average price decline three months later was 2.3%.

If we slide into recession, the macro economic environment will trump supply adjustments. Forecasters are betting hard on a China rebound in 2023, but if the world slows, China slows with it. Indicators of manufacturing activity in both China and the US are down, and in an environment of higher interest rates and credit contraction, recovery could be pushed out to 2024.

Last Tuesday, March 28th, just a few days before the OPEC cut, a phone call took place between Crown Prince Mohammed bin Salman and President Xi Jinping. Was a possible slowdown discussed and was this in part the reason for the OPEC surprise on Sunday? Oil settlement mechanisms were on the agenda based on news that followed, so why not projected demand for oil by China? See the last sentence of the Saudi readout:

“Aspects of the partnership between Saudi Arabia and China and joint coordination efforts to enhance cooperation between the two countries in various fields were also reviewed.”

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