Ex­porters’ woe as oil de­mand de­clines

In­fla­tion a key fac­tor with economies in US, Asia and China all on the down­side

The National - News - Business - - The Region - Mah­moud Kassem mkassem@then­ational.ae

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.”

An­drey Ru­dakov / Bloomberg

Oil prices en­tered a bear mar­ket last week on ac­count of in­creas­ing level of sup­ply in the mar­ket.

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