Oil Prices Ease, But Geopolitical Risk and China Policy Stance Check Losses

Oil prices have been easing recently, but geopolitical risks and China's policy stance are checking losses in the market. The global oil demand growth has been slowing down, with China's demand growth expected to be significantly lower in 2024 compared to previous years. This slowdown is driven by factors such as the rise in new energy vehicles (NEVs), high-speed rail networks, and a property sector slump.

Geopolitical risks continue to impact oil prices in the short term. For instance, the Russian invasion of Ukraine in February 2022 led to a 30% increase in Brent prices within the first two weeks. Similarly, terrorist attacks in Israel on 7 October 2023 caused a 4% increase in Brent prices before stabilizing. These events highlight the short-term impact of geopolitical risks on oil prices, which can be mitigated by other factors such as economic activity and financial markets.

Geopolitical risk indices, such as the Global Geopolitical Risk (GPR) index by Caldara and Iacoviello (2022), can help predict and understand the relationship between geopolitical risks and oil prices. These indices track news coverage of geopolitical tensions globally, providing a comprehensive perspective on risk levels. While historical data shows no clear relationship between oil prices and geopolitical events, a VAR model analysis indicates that global geopolitical shocks typically imply downward risks to oil prices. However, the time-varying effect of oil price on geopolitical risk is significant, with oil price volatility positively related to geopolitical risk for most of the sample period.

China's policy stance on electric vehicles (EVs) and renewable energy is reshaping global oil demand and prices. By 2024, China's oil demand growth is projected to slow significantly, with the International Energy Agency (IEA) estimating a mere 180,000 barrels per day (bpd) increase, down from 410,000 bpd in July. This shift is driven by rising sales of new energy vehicles (NEVs), high-speed rail networks, and a property sector slump. As China's oil demand growth decelerates, it will have a notable impact on global oil prices. However, geopolitical risks and China's policy stance on oil exports may check these losses.

Changes in China's economic growth targets and stimulus policies influence global oil demand and prices. China's slowing oil demand growth, driven by factors like new energy vehicles and high-speed rail, is expected to persist. Stimulus measures aim to steady the economy rather than boost oil demand significantly. This slowdown, combined with geopolitical risks and policy uncertainties, checks losses in oil prices.

In conclusion, while oil prices have been easing recently, geopolitical risks and China's policy stance are checking losses in the market. Geopolitical risk indices and China's policy stance on EVs and renewable energy play crucial roles in understanding and predicting the relationship between geopolitical risks and oil prices. As China's oil demand growth slows down, it will have a notable impact on global oil prices, but geopolitical risks and policy uncertainties may check these losses.