Oil Sinks After Hong Kong Court Rules Evergrande Liquidation

Oil snapped its three-day winning streak on Monday after a Hong Kong court ordered the liquidation of Evergrande Group, sparking a property crisis in China.

The US West Texas Intermediate (WTI) crude oil futures for March delivery plunged 2.66% to $76.78 per barrel on January 29. However, analysts predict a 0.39% recovery to $77.08 a barrel in the following trading day.

Judge Linda Chan cited Evergrande’s inability to present a concrete restructuring plan as the reason for the liquidation order. Liquidators are set to take control of the company’s assets and sell them to repay its $300.00 billion debt.

With the impending closure of the world’s most indebted property developer, China’s real estate sector faces a debt crisis. Such a scenario worried traders that petroleum demand in the world’s second-largest oil consumer would plummet.

Pressure from Evergrande’s demise overshadowed support from the escalating crisis in the Middle East. China was the largest crude importer in 2023, shipping 563.99 million metric tons (MMT) or 11.28 million barrels per day (bpd).

Meanwhile, geopolitical tension in the Middle East escalated after the US vowed retaliation for the Houthi’s Sunday attack. The Iran-backed militants launched an unmanned aerial drone at a Jordan outpost near the Syria border, killing three US troopers.

Evergrande Collapse Disrupts Chinese Oil Demand

The liquidation ends the Evergrande saga, more than two years after offshore investor Top Shine Global filed its winding-up lawsuit. It led to multiple suspensions, with the property developer restructuring its debts several times.

Economists expect creditors to recover almost nothing from the move, leaving everyone involved with a loss. Still, the move is anticipated to help China quell its property bubble, benefiting the economy in the long term.

However, the short-term disadvantages of Evergrande’s collapse may add weight to China’s already sluggish economy. The country’s stock market is struggling, with the Shenzhen Component Index declining 1.60% on Monday.

Key Chinese market indices have posted year-to-date losses between 7.00% and 10.00% before considering Evergrande liquidation’s impact. With the stock market in turmoil, demand for oil and other energy commodities in China is projected to fall sharply.