Exporters’ woe as oil demand declines
Inflation a key factor with economies in US, Asia and China all on the downside
Demand for oil is weakening globally amid tepid economic growth, which may spell more trouble for exporters of the commodity that have been battling a rise in supply in recent months, Bank of America Merrill Lynch said.
“While most investors blame supply for today’s low oil prices, demand has also failed to improve at the speed required to rebalance the global oil market,” analysts at Merrill Lynch said.
“A deep data dive suggests that in most places economic activity is either moving sideways or already turning south. In the US, China and Asia broad economic data have surprised to the downside lately, as has inflation.” As a result of the slowdown in demand for oil, the analysts said they doubted that their forecast of demand growth for both the second half of 2017 and 2018 of 1.3 million barrels of oil per day would be realised amid an increase in downside risks.
As well as signs of disappointing economic growth, the team of analysts said a tighter economic policy by the US Federal Reserve posed deflationary risks as rising rates could deepen the drop in commodity prices.
Bank of America Merrill Lynch is not the only one getting bearish on oil. The International Energy Agency (IEA) warned on June 14 of a “sobering” outlook for producers, with growing oil output from the US especially making it difficult to mop up the stubborn world oil glut. The IEA said the weak demand growth rate in the first half of the year of less than 1 million bpd would accelerate in the second half of the year, so that demand overall for 2017 would average 1.3 million bpd. This will increase to 1.4 million bpd next year.
But the agency also trimmed its forecast of how much it expected demand to outstrip supply in the second half of this year, from 700,000 bpd to 500,000 bpd, such has been the growth in US supply that has erased much of the impact of Opec/non-Opec cuts.
Oil prices, which entered a bear market last week on account of increasing level of supply in the market despite the agreement between major oil producers last year, rebounded slightly on Tuesday with benchmark North Sea Brent crude up 1.4 per cent US$46.48 per barrel late in the Arabian Gulf day. Commodity Futures Trading Commission data on Friday showed money managers cut their net-bullish position on WTI to the lowest in 10 months during the week ended June 20 and boosted wagers on falling prices to the most since August, according to Bloomberg. Data from ICE Futures Europe on Monday showed that speculators cut their net-long position in Brent by 19 per cent to the lowest in 17 months.
In a separate note on oil prices, the German investment bank Deutsche Bank warned that if the price of oil went down to $35 per barrel, it could start creating stress in the high-yielding bond market where energy company paper comprises a big chunk.
“Oil weakness to this point is problematic directly to energy valuations but is not yet a cause for credit-loss concerns in energy or the broader high-yield market,” Deutsche Bank said. “We are getting closer to the point where this narrative could begin to change.”
Oil prices entered a bear market last week on account of increasing level of supply in the market.