Where next for oil?
Jul 06, 2012
After a 30% slide from their March peak to under $90 a barrel, oil prices have bounced back to around $100. But the fundamentals suggest that “prices have further to fall”, says Leo Drollas of the Centre for Global Energy Studies.
Demand in the industrialised world has slowed as Europe’s downturn deepens and the American economy struggles. In April, China’s year-on-year crude oil import growth was almost two-thirds lower than the average figure for the first quarter. On the supply side, US crude stocks are at their highest since July 1990, while Opec’s production has reached a four-year high as Libya’s oil comes back on stream. Meanwhile, Saudi Arabia’s output has hit a 30-year high.
Note too that Saudi Arabia could easily make up for all the Iranian oil likely to be lost to the global market, thanks to sanctions against Iran, says Capital Economics. Iran is highly unlikely to carry out its 'perennial threat' to block the Strait of Hormuz, through which a fifth of the world’s traded oil passes. That would be “a military, economic and political disaster for the regime”.
The upshot is that “weakening demand and ample supply” points to further weakness in oil prices.
But will cheaper oil give the world economy a shot in the arm? Don’t count on it, says Capital Economics. Cheaper oil typically bolsters global demand by lowering petrol prices and providing more scope for interest-rate cuts.
But many consumers are concentrating on saving and paying off debts. There’s also scant scope for lower rates in the developed world, and more quantitative easing is unlikely to help. What’s more, in this case it was weak demand for oil that pushed prices down in the first place, so it “is wishful thinking to imagine that cheap oil can itself generate a recovery”.
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