Economy
Oil rises 4% on supply cut threats, still set for weekly drops
Oil prices rose about 4% on Friday, upheld by real and threatened cuts to supply, despite futures posting a second weekly decline as aggressive interest rate hikes and China’s Covid-19 curbs weighed on the demand outlook.
Russian President Vladimir Putin has threatened to stop oil and gas exports to Europe if price caps are imposed and a small cut to OPEC+ oil output plans announced this week also supported prices.
Brent crude rose $3.69, or 4.1%, to settle at $92.84 a barrel. US West Texas Intermediate (WTI) crude rose $3.25, or 3.9% to settle at $86.79 a barrel.
“Throughout the next few months, the West will have to contend with the risk of losing Russian energy supplies and oil prices soaring,” said Stephen Brennock of oil broker PVM.
Pressured by worries about a recession and demand, Brent is down sharply from a surge in March close to its all-time high of $147 after Russia invaded Ukraine.
The Group of Seven is trying to find ways to limit Russia’s lucrative oil export revenue in the wake of the invasion. A price cap that G7 countries want to impose on Russian oil to punish Moscow should be set at a fair market value minus any risk premium resulting from its invasion of Ukraine, a US Treasury Department official told reporters on Friday.
Despite Friday’s bounce, both crude benchmarks were headed for a weekly drop, with Brent down about 0.2% on the week after at one point hitting its lowest since January. WTI posted a weekly decline of 0.1%.
If the US Federal Reserve is able to keep the unemployment rate below 5%, it can be aggressive in bringing down inflation but after that trade-offs will appear, Fed Governor Christopher Waller said on Friday.
The Fed should be aggressive with rate hikes while the economy “can take a punch,” he said.
A US Department Of Energy official said the White House was not considering new releases from the US Strategic Petroleum Reserve (SPR) at this time beyond the 180 million barrels that President Joe Biden announced months ago.
“The White House is backing off another release from the SPR,” said Phil Flynn, an analyst at Price Futures Group. “Looks like a lot of the fears the market had previously have gone away.”
US oil rigs fell five to 591 this week, their lowest since mid-June, energy services firm Baker Hughes Co said, as the growth in the rig count and production has slowed despite relatively high energy prices.
Meanwhile, the European Central Bank’s unprecedented rate hike of 75 basis points this week and more Covid-19 lockdowns in China have weighed on prices.
The city of Chengdu extended a lockdown for most of its more than 21 million residents on Thursday while millions more in other parts of China were told to shun travel during upcoming holidays.
Money managers cut their net long US crude futures and options positions by 3,274 contracts to 165,158 in the week to September 6, the US Commodity Futures Trading Commission (CFTC) said on Friday.
The World Bank reported that approximately $3.15 billion is illicitly transferred out of Bangladesh each year through offshore accounts.
Citing the State of the Tax Justice Report 2020, the World Bank stated that the offshore financial wealth of Bangladeshis is estimated at 0.7% of the nation’s GDP.
“Including losses from corporate abuse and offshore tax evasion, tax revenue losses are estimated at over $700 million,” the World Bank stated in its latest Bangladesh Development Update report published on 2 April. This amount equals 2.2% of the country’s total revenue income in fiscal year (FY) 2019-20.
In the Development Update report, the World Bank noted that illicit capital flows into offshore accounts from Bangladesh have been increasing.
Referring to the latest Global Financial Integrity Report 2021, the bank mentioned: “Between 2009 and 2018, as much as $3.6 billion on average per year has been laundered from Bangladesh through trade mis-invoicing.”
The World Bank highlighted that Bangladesh’s illicit capital outflow through offshore accounts is high compared to some of the country’s peer nations in its Development Update report.
Currently, Bangladesh ranks 54th among 133 countries in the Financial Secrecy Index, which assesses the extent to which a country’s tax and financial systems facilitate individuals in concealing their finances from the rule of law, according to the World Bank.
The bank further stated that Bangladesh ranked 44th globally and 3rd in South Asia in terms of illicit outflows through trade mis-invoicing.
The International Monetary Fund (IMF) has once again lowered its growth forecast for Bangladesh’s economy to 5.7 percent for the current fiscal year of 2023-24. This revision was outlined in the IMF’s World Economic Outlook released on Tuesday, April 16.
The IMF’s revised projection highlights various global and local challenges, including persistent high inflation, unemployment, reduced remittance inflow, and a decline in industrial investment targets.
This marks the second time the IMF has reduced its economic growth forecast for Bangladesh. In October of last year, it initially projected a 6 percent growth rate, down from its previous prediction of 6.5 percent for the FY2023-24 period.
The IMF’s growth forecast follows a recent announcement by the Asian Development Bank (ADB), which stated that Bangladesh’s GDP is expected to expand by 6.1 percent in FY 2023-24, driven by export growth.
Earlier this month, the World Bank also weighed in, stating that Bangladesh’s growth will be subdued due to reduced private consumption affected by high inflation. It forecasted a GDP expansion of 5.6 percent in FY 2023-24, below the average annual growth rate of 6.6 percent recorded over the decade preceding the Covid-19 pandemic.
China’s economy grew faster-than-expected in the first quarter, data showed on Tuesday, offering some relief to officials as they try to shore up growth in the face of protracted weakness in the property sector and mounting local government debt.
However, a raft of March indicators released alongside the GDP data – including property investment, retail sales and industrial output – showed that demand at home remains frail and is retarding overall momentum.
The government has unveiled a raft of fiscal and monetary policy measures in a bid to achieve what analysts have described as an ambitious 2024 GDP growth target of around 5%, noting that last year’s growth rate of 5.2% was likely flattered by a rebound from a COVID-hit 2022.
Gross domestic product (GDP) grew 5.3% in January-March from the year earlier, data released by the National Bureau of Statistics showed, comfortably above analysts’ expectations in a Reuters poll for a 4.6% increase and slightly faster than the 5.2% expansion in the previous three months.
“The strong first-quarter growth figure goes a long way in achieving China’s ‘around 5%’ target for the year,” said Harry Murphy Cruise, economist at Moody’s Analytics.
“Industrial production also supported through the quarter, but weak March data is cause for some concern. Similarly concerning, China’s households continue to keep their wallets closed.”
On a quarter-by-quarter basis, GDP grew 1.6% in the first quarter, above the forecast for growth of 1.4%.
The world’s second-largest economy has struggled to mount a strong and sustainable post-COVID bounce, burdened by a protracted property downturn, mounting local government debts and weak private-sector spending.
Fitch cut its outlook on China’s sovereign credit rating to negative last week, citing risks to public finances as Beijing channels more spending towards infrastructure and high-tech manufacturing.
The government is drawing on infrastructure work – a well-used playbook- to help lift the economy as consumers are wary of spending and businesses lack confidence to expand.
WEAK MARCH DATA
The economy was off to a solid start this year, but March data on exports, consumer inflation, producer prices and bank lending showed that momentum could falter again and reinforced calls for more stimulus to shore up growth.
Indeed, separate data on factory output and retail sales, released alongside the GDP report, underlined the persistent weakness in domestic demand.
Industrial output in March grew 4.5% from a year earlier, compared with a forecast increase of 6.0% and a gain of 7.0% for the January-February period.
Growth of retail sales, a gauge of consumption, rose 3.1% year-on-year in March, against a forecast increase of 4.6% and slowing from a 5.5% gain in the January-February period.
Fixed asset investment grew an annual 4.5% over the first three months of 2024, versus expectations for a 4.1% rise. It expanded 4.2% in the January-February period.
“On the face of it, the headline number looks good… but I think the momentum is actually quite weak at the end,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.
Prior to the data release, analysts polled by Reuters expected China’s economy to grow 4.6% in 2024, below the official target.
Following the improved first-quarter GDP outcome, economists at ANZ raised their 2024 China growth forecast to 4.9% from 4.2% previously, while BBVA maintained their 4.8% growth projection.
Most investors appeared to take the headline GDP surprise with a pinch of salt given the weakness of the March data.
Traders said China’s state-owned banks were selling dollars to steady the yuan in the onshore market. China stocks .CSI300 were tracking broader markets lower as geopolitical tensions in the Middle East sapped risk sentiment.
CHALLENGES
The crisis in the property sector has been a major drag on China’s economy as it has rippled across business and consumer confidence, investment plans, hiring decisions and stock prices.
The March data highlighted the depth of the troubles in the sector, with investor confidence and demand still at a low ebb.
China’s new home prices fell at their fastest pace in more than eight years last month as debt troubles among property developers hurt demand.
Property investment slumped 16.8% year-on-year in March, worse than a 9.0% drop in January-February, while sales tumbled 23.7%, compared with a 20.5% fall in the first two months of the year.
With the Federal Reserve and other developed economies showing no urgency to start cutting interest rates, China may also face a longer period of subpar export growth in a further blow to policymakers’ hopes of engineering a strong economic recovery.
Adding to the challenge for China, authorities also have to contend with ongoing tensions with the United States over trade, technology and geopolitics.
Investors are looking to an expected Politburo meeting in April for clues on policy direction, though few analysts expect any major stimulus.
The People’s Bank of China (PBOC) has pledged to step up policy support for the economy this year, with markets betting on further cuts in banks’ reserve requirement ratio and interest rates.
Some analysts believe the central bank faces a challenge as more credit is flowing to production than into consumption, exposing structural flaws in the economy and reducing the effectiveness of its monetary policy tools.
Looking ahead, Jinyue Dong, senior economist at BBVA research, said he believes the “recovery has not got a solid foundation yet as the deep adjustment of real estate market and local government debt overhang still remain the main risks.”
“In addition, geopolitics risks mostly due to China-US confrontations before the US president elections will persist in the foreseeable future.”
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