China swoon stings U.S. energy market
Tension eased in the oil market Tuesday after the previous day’s price plunge, but the energy world focused more sharply on its latest threat: China’s sapped financial system.
In recent days, the Chinese government’s major intervention in its stock market has set off warning bells for an oil industry that, over the past decade, could almost always count on China to be a vigorous consumer of crude oil.
Over the past month, Chinese stock values have fallen 25 percent — a crushing blow in many countries. Now, with government officials taking steps to gird its financial system, oil investors are worried the global giant could sputter and its
appetite for crude could wane.
“This is the first time in many years that the market’s automatic assumption that Chinese demand will be strong is starting to look a bit shaky,” said Morgan Downey, an oil trader and author of “Oil 101.”
“It all hinges on China now. Is it going to stabilize or continue to get worse? If the wheels come off in China, we’ll be stuck in this range,” with oil around $50.
U.S. crude dipped 20 cents Tuesday to $52.33 a barrel on the New York Mercantile Exchange, following Monday’s $4.40-a-barrel drop. Brent, the international crude standard, edged up 31 cents to $56.85 a barrel.
But the market was still weighed down by troubles overseas. At one point early in the day, a barrel of U.S. crude traded hands for less than $50.70 a barrel, but the price rebounded before the close.
The oil market also is waiting to see whether the European Union will avert financial crisis in Greece and whether Iran reaches a nuclear deal with Western powers, which could allow Iranian crude back into the oversaturated market. The U.S. State Department said a self-imposed Tuesday deadline to reach a deal with Iran has been pushed back to Friday.
China weighs down market
Yet China could prove to be the oil market’s biggest challenge. A Greek debt crisis could weigh on the euro, which would in turn raise the value of the dollar and make it more expensive for foreign investors to buy dollar-denominated oil. Iran’s deal could flood the market with more oil, up to 700,000 barrels a day in six months to a year, analysts say.
But China establishes global demand. Over the last decade, the emergent superpower has paved roads and built infrastructure to support a more urban nation, increasing demand for fuel and other things made from hydrocarbons, like the plastic wrap that preserves food in a supermarket.
In recent days, China’s central bank cut interest rates and market rule makers blocked Chinese companies from making initial public offerings. Nearly 1,000 companies have stopped trading, according to the Financial Times.
With China’s working population aging and its real estate market in decline for a year, oil traders worry that China’s economy could weaken more than it did last year, when it helped precipitate the oil bust.
“Is this downshift in China going to be harder, bigger than what we’ve already seen?” said Jim Burkhard, head of global oil market research at research firm IHS. “For the last couple of decades, China had a bigger working age population and fewer dependents, and that’s changing. The demographic sweet spot for China is over. That’s a structural change that’s in place.”
Oil demand in China has seemed immune to the broader economic weakness, growing 8.2 percent to an average 10.36 million barrels a day in May compared to the same month a year before. That is the fastest demand has grown since June 2013, according to a recent Platts’ analysis of Chinese government data.
For the first half of the year, Burkhard said, global demand rose more quickly than analysts had expected, so markets turned their attention to signs that U.S. production growth might decline and help ease the glut. The stock market shock in China could put the focus back on demand.
U.S. producers uncertain
Furthermore, analysts had assumed that oil would hover around $60 a barrel and drift upward the rest of the year. In the United States, oil companies slowly brought drilling rigs back into certain shale plays in recent weeks. That may be over.
“If oil stays at $50, people will hunker down again,” deploying fewer drilling rigs to the field, said Jason Wangler, an analyst at Wunderlich Securities.
That’s because $50 oil comes at an inopportune time for U.S. producers. Some have found financing harder to come by, with investors less receptive to a few recent corporate debt offerings. In the fall, banks will come calling to reassess how much credit they should extend, based on their financial health.
“Adding that rig right now is hard because you really don’t have those funds in hand,” Wangler said.
The U.S. Energy Information Administration said U.S. oil companies pumped 50,000 fewer barrels per day between April and May, and production will likely continue to swoon until next year.
Still, producers are expected to pump more oil in 2015 than they have in 45 years, with an expected average daily output of 9.5 million barrels this year. That’s about 40,000 more barrels per day than the EIA projected last month.
Michelle Foss, chief energy economist the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas, said that with low oil prices, the U.S. oil industry will have to start a wave of corporate consolidations soon and that there are “too many weak players, too many bad loans, too much debt.”
“We’ll be coming off of summer driving season demand pretty soon, and there is all the mess in the industry to clean up,” Foss said. collin.eaton@chron.com twitter.com/CollinEatonHC