In my previous Saturday report I speculated that prices would stay the same, though I said there was a possibility they would continue to fall. They did fall. Nymex-traded WTI fell about $5/barrel and Brent fell about $6/barrel (below).
Graph courtesy of oil-price.net. Prices have declined about 16% in the last quarter, with most of that coming in the last month.
The alarm level remains the same.
Oil Alarm Level — Orange
Despite the assiduous efforts of Goldman Sachs to get their clients to go long on crude oil, the markets have stubbornly refused to cooperate. Why is that? To answer that question, you've got to look at the global economy. And how does it look? Shaky, very shaky. The steady deterioration of global economic conditions does not bode well for oil demand.
As we often do, let's start with China, which has been responsible for about 40% of all new demand since the 2009 lows. Bloomberg told the story in China Manufacturing Contraction May Speed Stimulus.
China’s manufacturing may shrink for a seventh month in May, a private survey showed, reinforcing the need for stimulus as Premier Wen Jiabao accelerates a shift in policy to support growth.
The 48.7 preliminary reading for a purchasing managers’ index [left] released by HSBC Holdings Plc and Markit Economics today compares with a final 49.3 for April. If confirmed on June 1, it would mark the longest run of below-50 readings since the global financial crisis.
Today’s report, along with worse-than-forecast data from Japan and Taiwan yesterday, add to concerns that growth in Asia is in danger as the world grapples with the threat of Greece's exit from the euro. China will increase the intensity of policy “fine-tuning” amid rising “downside risks” facing the economy, the State Council, or Cabinet, said yesterday.
“This calls for more aggressive policy easing, as inflation continues to slow,” Qu Hongbin, Hong Kong-based chief China economist for HSBC, said in a statement. “Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption.”
... The manufacturing index stayed below 50 for eight months through March 2009. The new orders, export orders and employment components of the gauge all showed a contraction for May, while output expanded, according to the preliminary readings.
China's new oil demand has slowed dramatically according to Platts.
China's apparent oil demand in April edged up just 0.3% year on year to 38.32 million mt or an average 9.36 million b/d, according to Platts' analysis of recent data released by the government.
This is the lowest monthly growth in oil demand since June 2011, when it fell 8.2% year on year — from a high base — to 9.02 million b/d.
China does not release official data on oil demand or commercial and strategic oil inventories. Platts calculates the country's apparent oil demand based on official data on refiners' crude throughput and net oil product imports. April demand was dragged down by lackluster refining, with total runs falling 0.3% on year to 36.96 million mt, or an average 9.03 million b/d, according to National Bureau of Statistics data released on April 11.
April crude oil processing volumes were also the lowest so far this year on a barrels/day basis compared with 9.07 million b/d in March, 9.32 million b/d in February and 9.38 million b/d in January.
But net oil product imports rose 16.2% year year-on-year to 1.36 million mt (323,680 b/d) in April, although this was down 24.4% compared with 428,400 b/d of imports in March.
"The [macroeconomic] data out of China was particularly weak in April, and it was the weakest month in terms of oil demand for almost two years," said Neil Beveridge at Bernstein Research in a conference call held on Friday to discuss oil prices.
In the first four months of the year, overall apparent oil demand averaged 9.57 million b/d, up 1.8% year on year, according to Platts' calculations.
I'm not going to bother telling you the story in Europe. You already know about the huge slowdown there unless you've been unconscious for the last two years. In the United States, the best word to describe oil demand is lackluster. EIA data shows that demand has held steady between 18 and 19 million barrels-per-day for the last few months. We have entered the "summer driving season"—remember that?—but demand is well below what it was prior to 2008.
It's Memorial Day weekend and I'm sure nobody much cares about an incipient global recession. Gas prices are much lower than they were a month ago, and that's all that counts for Americans looking to hit the road this weekend. Americans have their heads firmly planted up their asses, so they have no idea why they are enjoying this happy reversal of fortune on gas prices. But they will no doubt pay for it in different way down the road (so to speak) when the global economy unravels.
Where will oil prices be in two weeks? I don't know. Could they fall even lower? Brent below $100? WTI below $90? It's possible. The market may (and likely will) overshoot to the downside. We'll see.
This is really more of a question than a comment.
1. We appear to have reached peak oil production of circa 75mbd (also reported at 84mbd but includes other sources).
2. if #1 is true, oil prices wil eventually reflect the economics of finite resources.
3. Our food and its supply is highly dependent upon oil.
4. The US has not made any serious attempt at making the necessary adjustments to a world without an energy surplus.
5. The US presently maintains a conventional military capability far larger than any reasonable threat from other countries.
6. The US economy won't work with high oil prices.
Given the above framework, will the US see high energy prices as an existential threat and use its overwhelming conventional (and nuclear) capability and simply seize the oil on the Arabian peninsula?
Posted by: H Read | 05/26/2012 at 11:03 AM