Global growth fears weigh on oil prices Brent benchmark falls below $90 to lowest level since December 2010
(…) Crude has declined sharply since Saudi Arabia cut prices to customers last week, signalling what analysts called a price war among members of the Opec cartel. The US this week reported oil production had hit 8.9m barrels per day, the highest in nearly three decades.
The bearish view was reinforced on the first day of a widely attended industry annual seminar hosted by Pira, the energy consultancy, in New York, said a person familiar with the proceedings. “The vast majority of the participants are bearish and the presentations have been extremely bearish as well. I suspect participants are leaving the sessions and selling,” this person said.
Another factor hastening oil’s fall may have been a large number of outstanding put options for oil, which entitle the holder to sell at a given price. Traders that had sold puts to clients were forced to sell futures to hedge risks as Brent broke below $90, pushing prices lower, market participants said. (…)
(…) For better or worse, the consensus view is that Saudi Arabia is trying to grab (or at least protect) market share by maintaining production and lowering its official selling prices to Asia – arguably the only growth market for oil. (…)
But some oil market watchers are not convinced by this explanation. They think there is more to Saudi Arabia’s reluctance to lower production.
Conspiracy theory 1:
The reason why the Saudis are holding out is because they could be in a tie-up with the US, in a bid to hurt Russia amid the crisis in Ukraine. The drop in oil prices has meant a big hit to Russian government coffers. Half of the Kremlin’s revenues are generated by oil and oil-indexed gas exports (which make up two-thirds of all Russian exports).
Problem here is that the US too needs higher crude prices to sustain its unconventional oil production.
Conspiracy theory 2:
On the other side of the spectrum there is the argument that this is an attack on the US shale industry, which, some argue, has eroded the importance of Saudi Arabia and other Gulf producers. A sustained slump in the price of oil could put many drillers and others working the US “tight” oil sector in a tough spot, curtailing production.
But this tactic would require a stronger will. Given the large productivity gains in US shale oil production in the past few years much further drops in the price would be needed – at around $85 a barrel – for a longer duration, before the industry’s cost curve is really disrupted. Also, this strategy would only stall production, not halt it completely.
So what is going on? Cooler heads say it is all about discipline within the Opec cartel.
Saudi Arabia has traditionally been the country relied upon to balance the market. When the market was over supplied, Saudi Arabia cut production, and when disruptions occurred (such as with Libya after the Arab Spring and Nigeria as a result of crude theft in recent years) it would pump out more.
Saudi Arabia is no stranger to using its influence and for a long time has shaped Opec policy. But the prospect of greater Opec supplies (from countries including Libya, Iraq and potentially Iran) will mean Saudi Arabia needs to ensure fellow members fall in line with future production targets and cuts, even if their domestic economies remain weak.
Among the chorus of recession forecasters based on superficial analysis, Markit brings its more balanced views:
German exports plunged 5.8% in August, adding to fears that the eurozone’s largest member state is sliding back into recession. The news follows data showing similar slumps in factory orders and manufacturing output.
However, difficulties in estimating for changing holidays urge caution in relying too heavily on the official data, suggesting the August drop overstates the deteriorating trade position and chance of recession. But PMI survey data confirm that a weakening trend is clearly evident, especially in industry and that, if not contracting, the economy is certainly cooling.
Data from the Federal Statistical Office showed the 5.8% drop in exports in August was the largest since January 2010, but the decline was in part due to the timing of school holidays. In many Länder, the holidays were later than usual. Such shifting holiday trends are difficult for standard seasonal adjustment techniques to make full allowance for.
A better indication of the underlying trend can often be gained by looking at the pattern over several months. Some reassurance can be gained from the fact that exports in July and August combined are running 2.0% higher so far in the third quarter compared to the second quarter. However, even this rebound does not provide a true picture of the trend, because the second quarter had also been affected by holidays. Exports rose a mere 0.5% in the second quarter, a period when GDP fell 0.2% and manufacturing output dropped 0.6%, in part due to an unusually high number of public holidays
The true export picture is therefore most likely something in between the steep decline signalled by the August data and the 2.0% growth seen in the third quarter so far. Fears of a recession may therefore be exaggerated.
PMI survey data add further clues as to the business trend in Germany, offering the advantage of tending to be less affected than official data by special factors such as changing holiday patterns. The PMI data suggest that the economy rebounded modestly in the third quarter, but that the recovery is all-too dependent on the domestically-focused services sector. Manufacturing growth slowed to stagnation in September, and goods exports barely rose, according to PMI respondents, staging the worst performance for 14 months. The deteriorating picture from the PMI surveys is one of German industry suffering from headwinds such as sanctions with Russia and ongoing economic malaise in its euro area partners, notably France and Italy.
Even if a technical recession is avoided, policymakers will no doubt be concerned by the loss of momentum in the euro area’s largest member state.