Fresh China woes weigh on oil price slide

A number of reports at the start of the year indicating that China’s economy is slowing further hit Chinese share prices hard, and worsened by government attempts to control the market’s decline.

Oil prices fell again on Monday as China’s weakening economy overtook supply issues as the market’s main worry.

World benchmark North Sea Brent crude futures fell about 2 per cent and were down 76 cents at US$32.79 per barrel in early afternoon trading in London, driven mainly by another decline in China’s main share price index.

A number of reports at the start of the year indicating that China’s economy is slowing further hit Chinese share prices hard, a development that was worsened by the Chinese government’s attempts to control the market’s decline.

The central bank’s move to devalue the yuan also has rattled markets worldwide, especially oil and other commodity markets that have been weighed down by oversupply for more than a year.

“Once again, it is all about China,” said Hussein Al Sayed, chief market strategist for IG, which facilitates market speculation.

Although there was no news on China’s economy on Monday, the fact that share prices fell even after China’s central bank marked the currency up for the second day in an attempt to soothe markets after its recent devaluations was a worrying development.

The market’s nervousness was further reflected in record high interbank lending rates in Hong Kong.

For the oil market, “fears are growing that we aren’t yet close to a bottom”, said Mr Al Sayed.

There are signs that more and more traders are betting on further declines, Mr Al Sayed said. “Some investors are even buying puts at $20 … indicating that turmoil is not over yet in energy markets.”

Those bets might prove incorrect, but they are further evidence that the oil market is in a period of heavy turbulence after the calm of the 2010-14 years.

“Even a year ago, there was a strong consensus for $90 a barrel [average oil price for the year],” although Brent last year averaged just under $54, Sebastien Henin, head of asset management at The National Investor, an Abu Dhabi investment and advisory firm, pointed out.

“Those same people are now saying we might go to $20 a barrel, or below. The only thing for sure is that volatility is back and the oil market is not likely to be balanced for at least a year,” Mr Henin said.

Although the worry now is focused mostly on demand weakening, there is growing evidence that the Saudi Arabia-led plan to squeeze out high-cost production, mainly in North America, is having an effect.

Deutsche Bank analysts noted on Monday that the oil rig count in the US was starting this year about 62 per cent below the level at the start of last year. They forecast that would lead to a reduction in output this year in the US by 680,000 barrels per day, which is well above the forecast by the US government energy information agency of a decline of 500,000 bpd, to 8.8 million bpd.

Deutsche Bank also forecast that the production decline would extend into 2017, although the US energy information administration expects production to rebound later in the year. But the EIA outlook is predicated on higher oil prices.

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