Analyst: China's Devalued Yuan Tied to Foreign Oil Consumption

Earlier this week, China surprisingly opted to devalue its currency, the yuan, forcing many in the oil and gas industry to ponder how the decision will affect their market.

“In recent days, we’ve seen China look to devalue the yuan in hopes of gaining some ground as the U.S. dollar continues its upward move,” said Carl Larry, director of business development with consulting firm Frost & Sullivan. “The move has caused a bit of uneasiness in the marketplace and stock markets around the world are a bit shaky.”

The move by China came ahead of an expected Federal Reserve System rate hike in September, which will increase the value of the U.S. dollar. Larry said the “preemptive move” means it is likely China is not prepared to handle change in the wake of its own economic recovery.

In 2015, China became the largest importer of crude oil, edging ahead of the United States at 7.2 MMbpd. Frost & Sullivan analysts point out that when considering the United States imports more than 3MM bpd from Canada and Mexico, it becomes “clear that China is the sole consumer of foreign oil and the majority from OPEC.”

OPEC has been reluctant to cut production, so in effect, there is little China can do as a consumer to mitigate a risk of deflation in a time of economic struggles.

Devaluing the yuan may be a move similar in principle to what other countries are doing by cutting out fuel subsidies. The pressure of lower oil prices may seem like a boon to a country like the United States, but for nations relying mainly on imports, the risk of deflation is a complication.

“With the United States not making any move to lower its production, it is left to OPEC to make a move to help stabilize the market. China’s move in their currency may be a slight action to propose that this oversupply in oil needs to be dealt with,” Larry said.

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