Asia wrap: OPEC throwing in the towel on China demand?

Shares in Asia and European equity futures climbed, riding the wave of another record high on Wall Street, fueled by tech stocks. Meanwhile, oil prices dropped after OPEC cut its 2024 demand forecast for the third consecutive time, effectively conceding that China’s economic slowdown and structural shifts, like the rise of electric vehicles, could be sounding the death knell for any more super cycles.

Further pressure came as the Middle East's long oil hedges were unwound following a Washington Post report stating that Israel doesn’t plan on targeting Iranian oil or nuclear facilities—taking some of the geopolitical risk premium off the table.

Shares in China and Hong Kong slid as investors watched for signs of further stimulus from Beijing. However, according to Chinese media outlet Caixin, policymakers are now floating trial balloons, with reports suggesting China may raise 6 trillion yuan ($846 billion) through ultra-long special government bonds over three years to revitalize the sputtering economy.

This is the kind of bazooka investors have been waiting for, rather than just reshuffling existing stimulus cards. Forget about U.S. allocators diving into China ahead of the U.S. election. To get traders interested in the next leg of the rally, China will need to show that the stimulus tailwind is kicking in and that the multiplier effect is starting to bear fruit. Without that proof in the economic pudding, global investors’ sentiment may remain cautious despite China’s grand plans.

China's oil consumption has significantly slowed in recent months and is now projected to increase by only 200 kb/d in 2024, a sharp decline from the decade-long average of 600 kb/d annual growth. This has led to speculation about whether the decline is a temporary anomaly, with demand set to rebound next year, especially in light of Beijing’s latest stimulus package, or if it signals a more lasting shift. We lean toward the latter, considering the rapid adoption of electric vehicles—now comprising over 50% of new motor vehicle sales—and the expansion of high-speed rail networks.