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30-05-2017

Analysts Say China, not OPEC, Dictates Oil Price - but Monday Trading Still Swayed by Cutback Extension

Investors are placing their faith in the argument that inventories will tighten later this year.

With holidays in the U.S., United Kingdom, and other countries, crude trading was fairly muted on Monday, climbing for a second consecutive session and accompanied by further arguments that the Organization of the Petroleum Exporting Countries (OPEC) is no longer the driving force in swaying prices.

Specifically, China has been identified as something that merits singular focus, according to Jason Schenker, president of Prestige Economics.

Schenker told CNBC that "If you wanted to know where the downside risk is, it is not in OPEC's decision or in U.S. driving demand or in global inventories rebalancing; I think China is the big source of concern."

Schenker pointed out that the world's second largest economy is also the second largest importer of crude, and that if its economy "weakens further, that poses downside risk, but if we see the rebound in the [China Caixin Manufacturing Purchasing Managers Index] and we see Chinese manufacturing PMI as a proxy for global growth improve, then we see some upside potential here."

Fereidun Fesharaki, founder and chairman of FGE, goes a step further: he said during a Center for Strategic and International Studies discussion in Washington D.C. that "Without China, the oil market cannot survive," and production falling in that country has spurred greater imports; he predicts imports this year will increase by 900,000 barrels per day (bpd) over 2016.

Nick Cunningham, energy and environmental journalist for Oilprice.com, pointed out that Moody's Investors Service downgraded China's credit rating on May 24 to A1 from Aa3 due to the likelihood of its government trying to bolster the economy with higher spending levels, thus ballooning the debt: "The decision from Moody's is ominous as it is the first credit downgrade for China in nearly three decades.

"Moody's expects economic growth to continue to slow in China, putting a heavier burden on government stimulus when debt has already started to become a concern."

Cunningham suggests that the extent of China's influence has yet to be appreciated "amid all the furor over the OPEC versus U.S. shale debate," and this was evident on Monday with oil rising on expectations the cartel will succeed in bringing down inventories - after dropping earlier in the session on news that U.S. drillers have added rigs for 19 straight weeks, bringing the total to 722 and causing analysts to worry that the increase will undermine OPEC's newly-agreed upon cutback extension to March of next year.

West Texas Intermediate later rose 19 cents to $49.99 and Brent rose 14 cents to $52.29 per barrel, apparently on the expectation of inventories falling "at an even faster pace in the coming weeks," according to Giovanni Staunovo, a commodity analyst at UBS Group AG, as well as assurances from Khalid Al-Falih, energy minister for Saudi Arabia, that OPEC's cutbacks are working and stockpiles will drop faster in the third quarter.

Last week, Daniel Yergin, a leading oil analyst, told media that "I think OPEC is actually back in business [but] as a swing producer...it's almost a different industry than it was three years ago."


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