By Gao Jinghui, China Petroleum and Chemical Industry Federation, 

Zhao Ning and Zhao Bowen, Sublime China Information (SCI)

Key summary

● China's Petroleum and Chemical Industry Prosperity Index was lower than the normal range amid cost headwinds

The US debt ceiling impasse led to a sharp rise in short-term market interest rates in May 2023, which imposed great impact on the liquidity of the global market, so the prices of crude oil and chemical products were on a decline. In the meanwhile, natural gas inventories in Europe and the US were significantly higher than the same period of last year because of the warm winter and air conditioning seasons during 2022-2023, and the prices of natural gas, coal, propane, and methanol kept falling. The cost-profit ratio of the petroleum and chemical industry dropped amid the cost headwinds, so China's Petroleum and Chemical Industry Prosperity Index fell back to a relatively cold zone.

● The Federal Reserve's interest rate hike and debt ceiling impasse affected short-term liquidity

The Federal Reserve hiked interest rates by another 25 bps on May 4, raising the target range of the Federal funds rate to 5.00-5.25%, the highest level since the 2007 financial crisis. The increased interest rates resulted in the outflow of deposits from the US banks and a slowdown in the credit growth, which were deteriorating the banking crisis. There were growing concerns as the two parties in the US did not reach an agreement on the debt ceiling issue in the second half of May. The risk of debt default raised short-term market interest rates, with the interest rates of notes due in June once exceeding 6%, which had a great impact on market liquidity in the short term. As a result, the prices of commodity, including precious metals, fell back.

Suggestions and notes

● Market forecast

Production will be resilient and inventory conditions will continue to improve, which will stabilize the market confidence. The volatility in profits will not affect the overall recovering trend.

● Risk alert

The energy headwinds will disappear, and it should be noted that energy prices may rebound in the summer.  

Overview of China's Petroleum and Chemical Industry Prosperity Index

China's Petroleum and Chemical Industry Prosperity Index fell to 94.95 in May 2023, down by 3.9 percentage points month on month. The level was lower than the normal range and classified to a relatively cold zone. The Index fell by 1.01 percentage points year on year, indicating that the year-on-year decline was quickly narrowed (see Figure 1).

Figure 1 Movement of China’s Petroleum and Chemical Industry Prosperity Index     (historical average level = 100)

China's economy saw some setback in May 2023, after entering a stable recovering period. According to data from the National Bureau of Statistics, the manufacturing PMI fell back to 48.8 during the month, down by 0.4 percentage points from April, with the inventories of raw materials regarded as the weakness. With the weakening supply-demand balance of the real estate market in major cities, market activities decreased, which imposed mounting pressure on destocking of houses. In April, social financing increased by RMB272.9 billion year on year. The increments of loans between enterprises and residents diverged, with an increase of RMB683.9 billion in corporate loans and a decrease of RMB241.1 billion in residential loans. International-wise, the Federal Reserve's interest rate hike and the US debt ceiling issue raised short-term interest rates, which hit the liquidity of the commodity market. As a result, the prices of commodity fell.

Industry-wise, China's Petroleum and Chemical Industry Prosperity Index fell as decreasing cost squeezed the margin room of the petroleum and chemical industry (see Table 1). Prosperity Index of Fuel Processing Industry dropped by 2.35 percentage points month on month amid the peak season of travel and freight demand, so its decline was the smallest among the sub-industries. Prosperity Index of Petroleum and Natural Gas Extraction Industry fell by 3.11 percentage points month on month, back to the relatively hot zone. Under the pressure of overcapacity at some phases, Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry and Index of Rubber, Plastic Products and Other Polymer Products decreased by more than 4 percentage points month on month, and it fell into the overly cold zone.

Hot spot analysis and future prospect

1. Reasonably looking into the impact of the short-term US dollar liquidity

Despite the short-term liquidity shock, it will be beneficial for accelerating the process of market recovery in the medium term. Instead, short-term liquidity tightening will speed up the swift of the Federal Reserve's US dollar tightening policy, which will be favorable to the recovery of the whole commodity market.

2. Energy prices may bottom out following the upcoming hot season in the northern hemisphere 

The inventories of global natural gas have far exceeded seasonal levels as affected by the warm winter from the end of 2022 and early 2023, leading to a sharp decline in global natural gas prices. Taking the prices of European natural gas at Title Transfer Facility (Dutch gas trading hub) as an example, the prices dropped from a high of Euro 220/megawatt in August 2022 to below Euro 30/megawatt in May 2023. The decline in natural gas prices has also pulled down the prices of coal, propane, and methanol. As for temperature, the hot season in the northern hemisphere will be coming soon: many parts of Asia have entered the hot season, and North America will be in the hot season in late June. Meanwhile, the temperature in Europe will also far exceed its historical level. High temperature will lead to a sharp increase in electricity demand, thereby boosting energy demand. As a result, there will be big chance for energy prices to bottom out. 

3. Future prospect of China’s petroleum and chemical industry 

The rebound of China's Petroleum and Chemical Industry Prosperity Index in April and the decline in May are the results of significant fluctuations in cost-profit ratio, which is a direct reflection of bigger volatility of international financial conditions under the tightening US dollar monetary policy. Excluding the impact of cost, inventory levels in the petroleum and chemical industry continue to increase, the production heat degree continues to rise, and producers are receiving more orders, so the recovery is on its track. It is expected that the rebound in commodity prices fueled by waning cost headwinds will lead to an increase in restocking demand in June, and China's Petroleum and Chemical Industry Prosperity Index will rebound.