Post by anenro on Jan 6, 2016 18:39:27 GMT 4
Oil Market: When China Sneezes... Look Out Below
World oil supplies are expected to rise soon due to higher oil exports from Iran.
China has been the engine of world oil demand growth.
Now it appears its demand growth will slow more-than-expected.
The timing for slower demand is coming at a bad time for oil prices.
Over the weekend, tensions mounted between Saudi Arabia and Iran. It appeared investors with long exposures to oil prices might finally catch a break, due to rising political risk.
But the respite from falling prices was very short-lived. In Shanghai, the stock exchange got battered Monday following release of a survey showing factory activity fell for the tenth straight month in December, the size of the drop accelerating from November.
Chinese stock markets tumbled 7%, forcing exchanges to suspend trading for the first time. For nearly six months, major shareholders in China's companies have been banned from selling their positions. The restriction is slated to end this week, and so those who could sell stampeded to get out ahead of them.
Tuesday, the central government intervened, buying up shares to support the market. Although it led to temporary support, it has the unintended consequence of signaling to potential buyers that prices are artificially high.
China's Economic Outlook
In OPEC's World Oil Outlook (WOO) released late December, it recognized that "the Chinese economy seems to be maturing and growth is decelerating faster than previously expected."
According to Lloyd Blankfein, CEO of Goldman Sachs, growth in China's export-oriented economy is not being sustained, and in fact, is unsustainable. The country had pursued a growth-at-any-cost approach, and has done so in a "ham-handed" way.
Lloyd Blankfein
"When they wanted to boost their economy like we were, they went out and built 82 airports at the same time... probably 35 are in the wrong place…They'll put a smoke-belching factory in the middle of a city... when you get to a certain level of wealth, you want to breathe...you can't continue with that level of pollution," Mr. Blankfein said.
The country has to build a market economy to grow further, and it faces some of the most difficult "execution issues" ever. "PetroChina (PTR) probably has one million extra employees, but how do you fire them? There is no unemployment or health care insurance," Blankfein explained.
The Goldman CEO explained they have to develop capital markets, a bankruptcy system, safety nets, all at the same time - hard to do that all at once. They need to develop those institutions and insurance companies, as well as institutional investors who become the capital allocators. And they have to go from an export economy to a service economy - a difficult transition to make.
Suspended Fuel Price Adjustments
China suspended fuel price adjustments last month to keep oil prices from falling further. It is trying to limit the growth in petroleum product consumption, according to the National Development and Reform Commission, the country's top economic planner, to help improve air quality.
"It seems that the government won't cut prices until the pollution situation gets improved," said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. "Otherwise more people will buy and consume cheaper fuel to add to pollution."
"With acute pollution across major cities in China, partly attributable to vehicle exhaust, the objective is to slow consumption growth," said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.
On Christmas, more than 220 flights at Beijing's Capital International Airport were canceled as pollution caused poor visibility, China's official Xinhua news agency reported. Hazardous smog blanketing China's north-east has sparked more red alerts, with authorities advising residents in 10 cities to stay indoors.
At the beginning of 2011, Beijing became the first city to allocate vehicle license plates using a lottery to limit the rise in new vehicles. Electric vehicles are exempt, driving EV sales to the highest level in the world, surpassing US sales.
China 2016 Crude Oil Demand
OPEC's WOO, the International Energy Agency and the Energy Information Administration are all forecasting a 3% growth in China's crude oil demand for 2016. This represents about one-quarter of world's oil growth for the year.
But Barclays Capital analyst Chi Zhang, based in Hong Kong, said BarCap expects Chinese economic activity to remain weak in 2016. China demand for oil is likely to moderate to around 2%.
"When China sneezes, the world could catch a cold," said a commentary in China's Xinhua news agency. "Other Asia" oil demand growth represents another quarter of oil demand growth expected in 2016 and could be impacted by China.
Blankfein has said this may be China's century but not every year is China's year.
A darker view sees a credit bubble emanating from years of misguided over-investment in China's infrastructure, housing and manufacturing. China has created an unsustainable credit bubble, and this will come crashing down, taking the Chinese-and by implication, East Asian-economy with it.
World oil supplies are expected to rise soon due to higher oil exports from Iran.
China has been the engine of world oil demand growth.
Now it appears its demand growth will slow more-than-expected.
The timing for slower demand is coming at a bad time for oil prices.
Over the weekend, tensions mounted between Saudi Arabia and Iran. It appeared investors with long exposures to oil prices might finally catch a break, due to rising political risk.
But the respite from falling prices was very short-lived. In Shanghai, the stock exchange got battered Monday following release of a survey showing factory activity fell for the tenth straight month in December, the size of the drop accelerating from November.
Chinese stock markets tumbled 7%, forcing exchanges to suspend trading for the first time. For nearly six months, major shareholders in China's companies have been banned from selling their positions. The restriction is slated to end this week, and so those who could sell stampeded to get out ahead of them.
Tuesday, the central government intervened, buying up shares to support the market. Although it led to temporary support, it has the unintended consequence of signaling to potential buyers that prices are artificially high.
China's Economic Outlook
In OPEC's World Oil Outlook (WOO) released late December, it recognized that "the Chinese economy seems to be maturing and growth is decelerating faster than previously expected."
According to Lloyd Blankfein, CEO of Goldman Sachs, growth in China's export-oriented economy is not being sustained, and in fact, is unsustainable. The country had pursued a growth-at-any-cost approach, and has done so in a "ham-handed" way.
Lloyd Blankfein
"When they wanted to boost their economy like we were, they went out and built 82 airports at the same time... probably 35 are in the wrong place…They'll put a smoke-belching factory in the middle of a city... when you get to a certain level of wealth, you want to breathe...you can't continue with that level of pollution," Mr. Blankfein said.
The country has to build a market economy to grow further, and it faces some of the most difficult "execution issues" ever. "PetroChina (PTR) probably has one million extra employees, but how do you fire them? There is no unemployment or health care insurance," Blankfein explained.
The Goldman CEO explained they have to develop capital markets, a bankruptcy system, safety nets, all at the same time - hard to do that all at once. They need to develop those institutions and insurance companies, as well as institutional investors who become the capital allocators. And they have to go from an export economy to a service economy - a difficult transition to make.
Suspended Fuel Price Adjustments
China suspended fuel price adjustments last month to keep oil prices from falling further. It is trying to limit the growth in petroleum product consumption, according to the National Development and Reform Commission, the country's top economic planner, to help improve air quality.
"It seems that the government won't cut prices until the pollution situation gets improved," said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. "Otherwise more people will buy and consume cheaper fuel to add to pollution."
"With acute pollution across major cities in China, partly attributable to vehicle exhaust, the objective is to slow consumption growth," said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.
On Christmas, more than 220 flights at Beijing's Capital International Airport were canceled as pollution caused poor visibility, China's official Xinhua news agency reported. Hazardous smog blanketing China's north-east has sparked more red alerts, with authorities advising residents in 10 cities to stay indoors.
At the beginning of 2011, Beijing became the first city to allocate vehicle license plates using a lottery to limit the rise in new vehicles. Electric vehicles are exempt, driving EV sales to the highest level in the world, surpassing US sales.
China 2016 Crude Oil Demand
OPEC's WOO, the International Energy Agency and the Energy Information Administration are all forecasting a 3% growth in China's crude oil demand for 2016. This represents about one-quarter of world's oil growth for the year.
But Barclays Capital analyst Chi Zhang, based in Hong Kong, said BarCap expects Chinese economic activity to remain weak in 2016. China demand for oil is likely to moderate to around 2%.
"When China sneezes, the world could catch a cold," said a commentary in China's Xinhua news agency. "Other Asia" oil demand growth represents another quarter of oil demand growth expected in 2016 and could be impacted by China.
Blankfein has said this may be China's century but not every year is China's year.
A darker view sees a credit bubble emanating from years of misguided over-investment in China's infrastructure, housing and manufacturing. China has created an unsustainable credit bubble, and this will come crashing down, taking the Chinese-and by implication, East Asian-economy with it.