Ionel Van den Berg @Lazacoin: "Did China Save the Markets?..."

Netherlands

Did China Save the Markets? 🇨🇳 When the conflict with Iran escalated, the obvious market narrative seemed straightforward: Iran - Strait of Hormuz - oil supply shock - higher inflation - weaker growth - lower equity markets. And there were plenty of reasons to expect a much deeper correction. The Strait of Hormuz is one of the world's most important energy chokepoints. At the height of the disruption, around 20 million barrels per day of crude and refined products were affected, roughly a fifth of global consumption. Yet equity markets didn't collapse. So what happened? One of the most interesting pieces of the puzzle was China. China is by far the biggest buyer of Iranian crude, accounting for roughly 90% of Iran's oil exports according to the U.S. Treasury. But something even more interesting happened to China's overall oil demand. Rather than simply competing with the rest of the world for increasingly scarce barrels, China sharply reduced its crude imports and drew down inventories. The IEA estimates that Chinese seaborne crude imports fell by a massive 3.6 million barrels per day between February and April. Japan, Korea and India also reduced their imports significantly. And according to Reuters, China's crude imports averaged just 7.78 million barrels per day in June and July, around 4.21 million barrels per day below its pre-war average. That reduction essentially matched the shortfall in Asian crude imports caused by the disruption. Important nuance: China didn't act out of altruism to "save" the market. Its response was primarily driven by its own economic interests. Elevated oil prices, weak refining economics and the ability to draw on substantial inventories gave Chinese refiners a strong incentive to reduce crude purchases. But the effect on the global market was the same: Demand fell precisely when supply became constrained. And that may be one of the most interesting aspects of this entire episode. Think about that for a moment. The world lost supply, but demand fell at the same time. China effectively absorbed a large part of the supply shock by buying less from the global market and drawing on its substantial oil reserves. And China wasn't alone. The global oil market entered the crisis with some excess supply. Producers outside the Gulf increased production, while inventories were drawn down heavily. According to the IMF, three major shock absorbers helped prevent an even larger oil price spike: lower demand, additional production and inventory drawdowns. That helps explain something that initially looked strange. The headline was: "One of the world's most important oil chokepoints is effectively disrupted." But the economic reality became: "The global system is finding ways to absorb the disruption." Oil prices did spike dramatically. Physical Dated Brent reached around $144 per barrel at the height of the disruption. Since then, prices have fallen sharply, with Brent now trading around $84–85, well below the $100 level. That's a remarkable reversal considering the Strait of Hormuz remains a major source of uncertainty. And this is an important distinction. Markets don't ultimately price the headline. They price the economic consequences of the headline. A geopolitical event can look catastrophic, but if supply can be redirected, demand can adjust, inventories can be released and alternative production can increase, the actual economic impact can be much smaller than the initial fear suggests. That may be one reason equity markets didn't fall nearly as far as many expected. But there is another side to this story. These shock absorbers aren't unlimited. The IMF warns that much of the available buffer has already been used. Inventories have been drawn down, spare production capacity has been deployed and demand has already adjusted. So the real question might not be: "Why didn't markets fall further?" Perhaps the better question is: Did the market correctly understand the resilience of the global energy system, or have we simply used up some of the buffers that protected us from the first shock? And if another major disruption happens before those buffers are rebuilt... Will the market react very differently next time? What do you think? $NSDQ100 $OIL $SPX500 $PLTR (Palantir Technologies Inc.)

Not investment advice. The author may have financial interests in the mentioned instruments.