Global growth outlook spooks crude oil

After threatening to spiral upwards, crude oil prices have started to fall again.

After registering a multi-year low at $42 in mid-March this year, WTI (West Texas Intermediate) crude oil prices on the Nymex began to head northwards. In a short span time of seven weeks, the commodity had appreciated 48 per cent to mark a high at $62.5 on May 6.

However, it has since failed to sustain its upward momentum and resumed its decline.

Crude oil has now closed on a negative note for the third consecutive week, falling below a key technical support at $54.

Financial factors such as the strong appreciation in the US dollar against major currencies, the global commodity rout due to lower Chinese growth, continued benign interest rates in the US and monetary easing in other regions have played a role in the renewed pressure on oil prices.

Recent data points on oil market fundamentals suggest that the market remains over-supplied. The latest weekly crude oil inventory report from the US (for the week ended July 10) showed that oil stockpiles declined by 4.3 million barrels for the week. Still, long-term oversupply concerns have overshadowed this recent decline in inventories.

Present US crude oil inventories, at 461 million barrels, are at an 80-year high and 23 per cent more than the average stock levels of 375 million barrels for 2014. Steady appreciation in the US dollar in recent weeks is also proving negative for crude oil prices. OPEC’s Monthly Oil Market Report released on July 13 took note of the fact that the global GDP growth forecast for 2016 is higher at 3.5 per cent, compared to 3.2 per cent growth this year.

Asian growth

While China is expected to sharply decelerate from 6.9 per cent to 6.5 per cent, this is expected to be made up by higher growth in India (7.7 per cent in 2016 versus 7.5 per cent in 2015), Russia and Brazil emerging from recession.

As a result, the projection can translate into higher oil consumption.

Though the growth is forecast to be lower than the current year, highest oil demand is seen coming from China, the report says. Based on the forecasts, the world demand for oil is projected to increase to 1.34 million barrels per day in 2016, up from 1.28 million barrels per day in 2015.

OPEC’s Monthly Oil Market Report says that better-than-expected momentum in the global economy, especially in the emerging markets, would contribute to oil demand growth in the coming year.

OPEC and non-OPEC oil supply globally are expected to grow by 0.17 and 0.30 million barrels per day in 2016, respectively.

These fundamentals do not provide a basis for a strong uptick in prices.

But then, crude oil prices seldom respond to fundamental factors alone.