China is far from being the life and soul of the party just now. And, insofar as it does set the mood, then it’s in the negative sense. Disappointing economic data – both industrial production and retail sales remained below analysts’ forecasts in July – are generating increasing concern among market players at the moment. Just how bad the situation in the world's second largest economy is was demonstrated by three cuts in interest rates by the People‘s Bank of China (PBoC) within the space of three months. The stuttering economy is not only causing equity markets to wobble, though: it is also having an impact on commodities markets – and on the price of oil in particular. The Middle Kingdom is the world’s largest importer of what is known as “black gold”. Following the weak economic data, the price of crude oil of the Brent grade from the North Sea and WTI light oil from the US quickly fell around 3%.
The latest correction in oil prices is only a small downward blip in the overall price picture, however, with the setback having been preceded by a pronounced rally. The raw material has appreciated by around a fifth since the end of June. And not without reason: at its meeting in Vienna, the expanded Organization of the Petroleum Exporting Countries (OPEC+), which numbers 23 countries in total, agreed to produce less oil in the coming year. Some 40 million barrels (1 barrel is 159 litres) are to be produced each day, a cut of just under 3.4%. As if that was not enough, various OPEC countries such as Russia, Iraq and Saudi Arabia are also making voluntary reductions at their own discretion. In Vienna, Saudi Arabia held out the prospect of a 1 million barrel per day drop in oil production for July.
No sooner said than done: the latest monthly report published by OPEC shows that in July Saudi Arabia dialled production back by 968,000 barrels per day compared with the previous month. This in turn led to a reduction of 836,000 barrels per day in total OPEC output. According to press agency Bloomberg, in this quarter global oil markets are now threatened with a significant supply deficit of more than 2 million barrels per day. Since Saudi Arabia would like to maintain its cut, calculations indicate that in the third quarter consumers will, on average, have around 2.26 million fewer barrels per day available to them than they need. According to the organisation's data, this could lead to the sharpest decline in stocks for 2 years. While large consumer nations are criticising the cutback, the kingdom is proving obstinate and threatening to prolong or even intensify the supply restrictions if necessary.
Back to China. The gloomier economic picture, allied to burgeoning deflation, could bring some relief to the tight oil supply situation, because declining economic output generally goes hand in hand with lower demand for the lubricant. This was already evident in July, when crude oil imports of the world's second largest economy plunged to their lowest level in six months. In Europe and the USA, too, fears of recession are continuing to germinate, as demonstrated by the latest ZEW indicator for the whole currency zone: its assessment of the current situation worsened by 11.8 to minus 71.3 points. Both China and Europe, though, will do all they can to crank their economies up again. Meanwhile, the USA is also contributing to shortages on the oil market, with US crude oil stocks falling by around 6.2 million barrels last week, much more than the 2.3 million expected by analysts. In general, OPEC anticipates a brief period of stagnation before global demand starts rising again. This is set to climb 4.1% by the fourth quarter compared with the three months just gone.
Source: OPEC
