The GERM Report

-China switches sides in the Thucydides Trap with India

-The rally in crude oil prices this morning is a false positive.

Crude oil prices were in rally mode in early morning trading after manufacturing readings in the European economy prompted something of a sigh of relief. Factory activity in China showed an uptick in August not seen in nearly a decade, while Germany’s manufacturing pace was running at its fastest clip since February 2018. That optimism may be short-lived, however, as traders will quickly shift their focus to US crude oil inventories. Elsewhere, India reported a severe economic contraction and, with the US retreating from the international stage, that decline may provoke adventurism in Thucydidesian fashion from China.

The price for Brent crude oil was up some 1.3% in early-morning trading, coming in at $45.86 per barrel as of 8 a.m. ET. Oil was supported by bullish PMI readings in Europe and the sharp rebound in the Chinese economy.

The Purchasing Managers’ Index for German manufacturing crossed the 50 threshold that separates growth from contraction to his 52.2 in August, lower then expected, but better than the July reading of 51. The German government revised its latest estimate on GDP from negative 6.3% to negative 5.8% on the year, with statements out of Berlin hinting at a V-shaped economic recovery. That said, the government said the economic situation on the global stage was troubling, as was US handling of the pandemic.

For China, its PMI rose from the July reading of 52.8 to notch 53.1 in August, beating analyst’s expectations. Supplying big-box retailers like Walmart and Home Depot, factory floors are busy in the Chinese manufacturing center. That is supportive of crude oil prices in a way given the myriad of consumers products made from petroleum. Commenting on the latest PMI reading, Wang Zhe, a senior economist at Caixin Insight said the index “has now risen for four months in a row, reflecting that the manufacturing sector continued to recover from the impact of the pandemic, and that the momentum of the recovery remained strong.”

India, one of the largest economies in the world, is not so lucky. Like the US economy, India’s was already showing strains before the pandemic. India reported second quarter GDP a negative 23.9% in what could be the start of the deepest contraction since record-keeping began in the mid-1990s. That contrast with China comes as both sides are testing their military capabilities. The Time of India reports that fresh clashes have erupted between both sides on their shared borders. There’s no shortage of finger-pointing, with China’s embassy in India blaming India for gross violations of Chinese sovereignty. Amid the talk of a new Cold War between the United States and China, it seems as if Beijing is switching positions from Athens to Sparta in a Thucydides Trap with India.

But don’t get too excited about the rally in the price of oil. The upcoming extended Labor Day weekend in the United States will be certain to test the nation’s mettle during the pandemic. And with politicking turning increasingly toxic, social conflicts could flare up. Demand, meanwhile, could be suppressed by stubbornly high unemployment levels and stimulus packages still held up by partisan gridlock.

“Despite the drop in amount of labor needed to fuel the car, it is sadly juxtaposed with historic unemployment rates,” Patrick De Haan, head of petroleum analysis at pump-watcher GasBuddy, said in a statement. “Fewer hours of work required to fill a gas tank does not offer much relief for millions of Americans without jobs across the country.” 

Elsewhere, a survey of economists from the Reuters news service finds the price of oil, as has been the case since early July, will remain stuck where it is, showing only a modest uptick by next year. Brent crude oil is expected to average $42.75 per barrel this year, up from the July estimate of $41.50 and against a $42.60 per barrel average so far this year. Demand, meanwhile, is expected to drop by as much as 10 million bpd, versus the high-end estimate of an 8.5 million bpd dip in July. Nobody in their right mind should be thinking triple-digits for the price of oil anytime soon.