Signs of hope for global economy amid new slump in oil price
By OIL prices have tumbled to a three-month low as surging supply once again exposes the chronic global glut and threatens to perpetuate the energy slump for another year.
US crude contracts fell to $42.40 yesterday before reovering slightly on profit-taking. They have fallen by 9pc in the last four sessions.
Speculators have given it an extra push. Data from the Commodity Futures Trading Commission in the US show that 52 hedge funds have taken out large short positions. Prices are unlikely to retest the February lows of $26, when world markets were in a full-blown “China panic”, pricing in a global recession that never happened.
The latest oil tremors reveal little about the underlying health of the global economy, which has so far shrugged off Brexit fears and may be accelerating as central banks and governments in Asia, Europe, and North America step up precautionary stimulus.
China’s growth rose to 6.7pc in the second quarter, fuelled by surging credit. Proxy indicators tracked by Capital Economics show a marked pickup in June, with enough fiscal spending in the pipeline to keep China’s mini-boom running through the year.
Other commodities have rallied over the last month and may be a better reflection of the global economy. The base metals complex, steel, and grains are mostly moving in lockstep with global stock markets, catalysed by the surge in the world money supply that lies behind it.
The broadest “M4 Divisia” gauge of money in the US is growing at the fastest pace in four years, a rise that would normally signal stronger economic growth ahead and reflationary pressure.
The growth rate of M4 Divisia jumped to 5.9pc in June from 2.8pc a year ago, according to the Centre for Financial Stability. The US money data sets the tone for the rest of the whole dollar-linked global system, and especially for emerging markets. Simon
Ward, from Henderson Global Investors, said his gauge of the world’s money supply – real six-month M1 money – is growing at an annual rate of 10.5pc, the fastest since the blitz of stimulus after the Lehman crisis. “We think global growth will be strong until the spring of next year,” he said. The data is hard to square with a prolonged commodity slump.
The International Energy Agency (IEA) estimates that global demand for crude rose a respectable 1.2m barrels a day (b/d) in the second quarter to 96m, driven by the fastest rise in oil consumption by the rich OECD countries since 2010. The IEA expects the momentum “will be roughly matched through the year as a whole”.
The current sell-off is driven almost entirely by output coming back on stream after a string of disruptions, revealing just how far the market had got ahead of itself in May and June.
Roughly 1.2m b/d of Canadian oil is poised to flow again as forest fires in Al- berta are finally contained. Nigeria lifted production by 300,000 b/d to 1.9m in late June as the government edged towards a truce with Delta rebels.
Adam Longson, from Morgan Stanley, said the rebalancing would take a lot longer than previously assumed. “The markets are oversupplied well into 2017,” he said. Inventories in OECD states are a record 3,075m barrels and are still rising.
JP Morgan said the creation of a national unity government in Libya could add an extra 400,000 b/d to global supply if the deal holds. At the same time, the US shale industry has proved more resilient than expected as it masters new drilling tricks and slashes costs. A recent report by consultants Wood Mackenzie estimated that some prime shale fields in Texas can now make a profit below $40 a barrel.
This is happening as Opec continues to nudge up output to a record 33.2m b/d in a fight for market share, with Iran already up by almost 1m b/d since February to pre-sanctions levels of 3.6m b/d.
Richard Mallinson, from Energy Aspects, said excess stock built up by refineries is the trigger for the latest slide in crude but this disguises an underlying shift in the market balance that could ultimately lead to a supply crunch.
Output has slumped by 400,000 b/d in China over the last year, yet the country is stepping up purchases for its strategic petroleum reserve by roughly the same amount. Mexico has lost a further 250,000 b/d as old fields are depleted.
“Global demand is quite healthy. We think the market will become increasingly tight, with prices in the $70s in 2017,” he said.