Oil Bull Market Rally Could Soon Falter Without China
Those hoping to make it big on oil commodities would do well to bet against the bulls on parade, as China won’t be around to keep prices afloat this time.
During the early days of the Great Recession, oil prices quickly regained footing thanks to China’s then-booming economic standing, Bloomberg reports. However, fuel use in the nation has slowed by half of what it was in the previous decade, following global trends of decreased consumption.
Global demand is expected to grow 1.3 million barrels/day to 94.58 million in 2016 according to the Energy Information Administration, with China taking 11.34 million barrels/day; the U.S. will use 19.44 million/day, lower than what was used in 2008. The figure is an increase of 3.1 percent over this year, yet pales when compared to the 11-percent jump in 2010. The spike delivered a boost to oil prices of 15 percent.
Combined with rising oil production pushing toward a glut in supply — to the tune of 1.8 million barrels/day in inventory currently, and 900,000/day during H2 2015 — China’s economic power faltering despite the government’s best efforts, and technological advancements reducing overall oil consumption, the global demand for oil will remain low for some time to come.
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One of the big mistakes is to associate oil solely with the automotive sector. Oil is much more than that. Oil is everything. Everything you have in your home is made out of oil or with oil or using oil. Pharmaceuticals, chemicals, plastics, etc. etc. all based on oil. It takes 400 kg of oil to make just one laptop computer. The only way is up.
Rising oil production is a reality, for now. Rig counts are significantly down but the producers in the shale formations have kept the ultra productive rigs pumping hard. Shale wells get played out in a few short years, some as little as 18 month. So it is possible that the production increase may be followed by a noticeable decline as these productive wells are shut in. Then it is a matter of if the price of oil is high enough to warrant the investment in drilling more wells. So, look at the sales figures of the automakers and look at what vehicle classes are selling best and what is the trend.
We made a small investment in oil & gas recently, since westerners are running out and buying big cars and trucks while the price war was keeping gas prices low. But its days are numbered now that electric power has become much more competitive. Over the past couple of decades, the price of solar power has come down from "astronomical" (as in, we only used them for satellites) to "cheaper than natural gas" as of just a few years ago. http://www.investmentu.com/assets/images/content/2015/03/price-of-various-energy-sources-1946-2012-chart.png The big problem being that since the US dollar got off the gold standard way back when, growth in oil consumption has been the main thing keeping the USD afloat, and without fail we'd readily go to war with anyone daring to sell oil in the global market with any other currency. So... could be interesting times ahead as we slip into a more IP-based economy, because if there's anything sillier than fighting over cheap energy (energy is everywhere!), it's fighting over ideas.
This analysis failed to understand that not only the demand will affect price, but the price can also affect demand. When the oil price is low enough, many previous impossible business models will now be viable. For example, heating oil for China (instead of coal). We are looking at a time delay here. If the low oil price is here to stay any longer, the Chinese demand will go back up.