China manufacturing weakness weighs on crude; outlook dims further

Nurluqman Suratman


SINGAPORE (ICIS)–China’s manufacturing sector lost further momentum in May, heightening concerns that oil consumption in the world’s second-biggest economy could weaken further.

Oil prices were trading lower on Wednesday, weighed down by the downbeat data from China and lingering uncertainties over the US debt ceiling pact.

 Prices at 03:50 GMT ($/bbl) Latest Previous Change
Brent July 73.35 73.54 -0.19
WTI July 69.26 69.46 -0.20

China’s official manufacturing purchasing managers’ index (PMI) for May fell deeper into contraction mode at 48.8, which is a five-month low.

A PMI reading below 50 indicates contraction, while a higher number denotes expansion.

The new orders subindex fell to 48.3 in May, while the new export orders subindex fell to 47.2.

China’s official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, fell to 54.5 in May from 56.4 in April, marking the slowest pace in four months.

In-person services sector staged a strong rebound during the first post-COVID holiday in early May (Labour Day), with domestic tourism trips and revenues both exceeding their 2019 pre-pandemic levels, Japan’s Nomura Global Markets Research said in a note.

“We expect [China’s economic] growth momentum to weaken further in May, as property distress worsens, the export slowdown deepens, and because Beijing has still not taken meaningful action,” it said.

“Beijing might be more cautious this time around as policymakers are faced with a smaller policy toolkit, a structural collapse in the property sector, and a much more complicated geopolitical situation,” Nomura said.

Brent crude continued to trade sideways this week as the market awaits a decision from oil cartel OPEC and its allies (OPEC+) on 4 June regarding production.

“The warning from the Saudi energy minister over short-selling in oil supported prices last week, however, broader macro-economic concerns, uncertainty around the US debt ceiling agreement and the possibility of a continued rate hike in the US weighed on the sentiment,” Dutch banking and financial services firm ING said in a note.

Other demand concerns remain linked to China’s oil consumption growth this year as it is expected to play a major role in driving global oil demand growth this year, Vivek Dhar, director of commodities research at Commonwealth Bank of Australia, said in a note on Wednesday.

China is projected to account for nearly 60% of global oil demand growth in 2023, according to the International Energy Agency’s (IEA) latest latest Oil Market Report.

“With China’s industrial output and fixed asset investment growing more slowly than expected last month, markets are worried that China’s commodity demand is weakening more quickly than anticipated,” Dhar of the Commonwealth Bank of Australia said.

“The current pessimism surrounding China’s commodity demand stands in contrast to the optimism at the beginning of this year. Markets were hopeful earlier this year that China’s pent- up demand would hold up strongly following the reopening of China’s economy,” Dhar said.

Focus article by Nurluqman Suratman

Thumbnail image: At Qinzhou port in south China’s Guangxi Zhuang Autonomous Region on 11 May 2023. (Source: Xinhua/Shutterstock)


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