China continues to fight its growing inflation and tries to slow down the economic activity by raising its interest rate. What does it mean for the energy market, especially crude oil prices?
China’s central bank recently announced it will raise its basic interest rate by 25 basis points to 6.31%. This is the second interest rate raise this year. The current interest rate is a full one percent point higher than what it was back in April 2010.
China also raised the reserve requirements of its commercial banks in order to curb the growing banking loans: On 24 February, it raised the reserve requirements by 50 basis points to 19.5%.
These steps were taken in order to fight China’s rising inflation. In February its inflation reached 4.9% in annual terms, which is above the inflation target of the Chinese government.
How these steps might affect the commodities market and prices such as crude oil prices?
China is making efforts to shift its energy usage towards natural gas: In 2010 China’s natural gas consumption increased by 18.2% (Y-2-Y) while coal and crude oil consumption increased by only 5.3%, 12.9%, respectively.
China’s total energy consumption rose in 2010 by 5.9% (Y-2-Y), however since its GDP grew during 2010 by 9.8%, this means that the energy consumption dropped by nearly 4% in terms of GDP growth.
These recent steps China took to curb the rising inflation, might adversely affect its consumption of commodities, including natural gas and crude oil. As the economic activity slows down, the domestic demand for crude oil and natural gas might decline.
From the other end, if China will continue to raise its consumption of natural gas over crude oil and coal (for economic and environmental reasons) this will also help China reduce the current inflation pressures since natural gas is much cheaper than crude oil.
Therefore, we might see that China will reduce its demand for energy commodities, especially crude oil, in the upcoming months, if China will continue in this line of fighting its rising inflation.
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