Publications: Notes at the Margin

Monopsony vs. Oligopsony: China's Possible Takeover of Oil (August 23, 2021)

 

The focus this week is on China’s efforts to curb the rise in commodity prices, including oil. We discuss China’s use of strategic stocks to suppress prices. In completing our report, one Chinese government actions emerged as especially important: an order to banks to stop selling commodity-linked products to retail buyers and to unwind their existing books for those products. This instruction is significant because Chinese speculators have been a large part of the long side in the oil futures market.

 

The subsequent drop in open interest, along with China's strategic stock release and "private" petroleum product inventory draws, reveals the government's heavy hand behind the significant decline in oil prices. To add to the current uncertainty, it is difficult to know whether the mandated commodity position liquidation has finished. If not, the price of oil may soon begin with a 4.

 

China’s actions on commodity prices, then, have pushed oil prices down. The decline may depress US output and even force more consolidations or bankruptcies in the industry. The decrease will also speed the departure of oil investors. Ultimately, power may move back to OPEC as non-OPEC production falls and global oil use increases.

 

There is, though, a significant question. Will China tolerate oil price increases, or will it hasten the switch away from oil? The country has monopsony power, as it has demonstrated, and is not afraid to use it.

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