Jul 14 2013
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Oil price crash seen in not so distant future
Markets spiked late last week as the US Energy Information Administration's (EIA) weekly crude stockpiles tumbled by 9.9 million barrels in the week ended July 5, indicating some pickup in demand.
And while the fast changing political scenario in the Middle East helped strengthen the crude markets somewhat, the statement of the Fed chief Ben Bernanke clarifying the US central bank's stimulus drive would be kept in place "for the foreseeable future," also helped the markets maintain some confidence.
But all this appears short-lived - when seen in perspective. Ominous signs are there to be seen on the crude horizon. In the short-to medium-term, fundamentals point to a contracting global market. Crude markets are hence poised to get softer, some are underlining now. With China struggling and Europe still on its heels, analysts are doubtful that global demand will continue to justify, in near future, the crude prices of around $100.
China has been perhaps the only, major, bright spot on the otherwise wobbling global economy - for some years now. It has helped keep a floor on most commodity markets. And crude was no exception. In fact Beijing's burgeoning crude consumption helped keep the markets afloat - to a great extent. Yet the massive Chinese engine is slowly and gradually cooling down. China's crude oil imports fell in the first half of 2013, marking the first January-June contraction since the depths of the financial crisis in 2009. China imported 138 million metric tons, or an average of 5.6 million barrels a day, of crude in the first half of 2013, preliminary data from the Chinese General Administration of Customs data released Wednesday said. This was 1.4 percent less than in the first half of 2012.In contrast to this downturn; China's crude imports had risen by 7 percent in the first half of 2011 and 11 percent in January-June 2012.
The oil numbers are part of wider China trade data showing drop in both - overall imports and exports for a second consecutive month. The Chinese dragon is finally slowing down - carrying immense implications to the overall crude world. Amid low inflation, Chinese economic data reported exports contracting by 3.1 percent in June, marking their first drop in 17 months. While imports also fell 0.7 percent, commodity imports took a steeper tumble, contracting 5.2 percent.
It comes as no surprise that China's economic growth has been stalling. China's gross domestic product growth in the first quarter of 2013 slowed to 7.7 percent from 8.1 percent a year earlier. Some analysts estimate that second-quarter GDP growth will be even slower, at 7.5 percent. Nomura's economic research team suggests there's 30 percent probability that the Chinese GDP would drop below 7 percent in the second half of the year.
And as Beijing cracks down on financial excesses and overheating markets, amid a global slowdown, China is increasingly emitting signals that a hard landing could be well on cards. And indeed if the world's second largest economy were to slow down dramatically, it would have a substantial effect on commodity prices, given China's outsized influence in those markets. Under an extreme scenario, oil prices could even drop to around $70 per barrel, Barclays economics research team said.
And China is not alone in generating bearish signals. The International Monetary Fund on Tuesday forecast slower global growth for 2013 and 2014 and warned against a more protracted recession in Europe. As per the projections, the global economy will grow more slowly than anticipated earlier - at 3.1 percent this year, down from the April projection of 3.3 percent. In 2014, the world economy will grow at 3.8 percent, compared with an earlier forecast of 4 percent.
The troubled eurozone also continues to add to the worries of the markets. It is now expected to contract by 0.6 percent this year, compared to the April forecast for a 0.4 percent decline. IMF managing director Christine Lagarde warned bluntly last week that 'the economic crisis in Europe had not been resolved' - as yet.
And to add to the woes of the market, the latest World Economic Outlook from IMF also projected an economic slowdown in key developing economies such as Brazil. These developing economies have also been contributing positively to the overall state of global economy - but that seems under clouds too.
The IMF has also lowered its forecast for the United States. It warned that the euro-zone officials risk reviving financial and economic stress amid a prolonged recession with a halting response to Europe's crisis.
Analyst now underline that oil at $100 a barrel helped attract the huge sums of money that's made possible the shale revolution in the United Sates, oil sands development in Canada, and ultra deep water production from the Gulf of Mexico and offshore Brazil. It's also spurred conservation. US vehicles are 23 percent more efficient than they were in 2007. Throw in rising production from Iraq and slowing Chinese demand growth, and it's possible the world will soon be, once again, awash in oil.
But all this could be in for a change. "It would be a mistake to assume that the oil price euphoria of 2007-2008 will not, at some point, be followed by a long-term adjustment similar to the 1980s oil price collapse," Amy Myers Jaffe, executive director of energy and sustainability at University of California, wrote in a blog post. She thinks oil in the $50 to $70 range will be the new norm in three to five years, and even sees $30 a barrel if the market over-corrects.
Jaffe's prediction may be one of the most bearish out there, yet some others may not be far off too. Citigroup has a current price target of oil in the $80-90 range by the end of this decade, citing all the new production and greater emphasis on conservation. Trevor Houser, an analyst at the Rhodium Group, also thinks oil prices will fall. Houser cites a Bloomberg poll of oil analysts showing the median oil price projection going from $108 in 2014 to $95 in 2017. He points to the futures market, where oil for 2017 delivery currently trades for under $89 a barrel.
Are we in for another round of price crash? Indeed there are many other variables impacting too - including the global geopolitics. Hence nothing can be said with certainty at this point in time. Yet if the currents signals are to be taken into account, price correction could just be round the corner - despite the current spike.
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