Source: Daily Forex
By John Richardson
WE warned on 4 April that real economics threatened a sharp correction in crude-oil prices and it now appears to be happening.
“New York’s main contract, West Texas Intermediate for May delivery, closed at $US88.71 a barrel on Monday [15 April], down a hefty $US2.58 from Friday,” wrote The Australian in this article.
“Earlier in the day WTI had slumped to $US87.86, its lowest level since late December.
“Brent North Sea crude for delivery in May tanked $US2.72 to settle at $US100.39 a barrel in London trade. The European benchmark had flirted with $US100 – a level not crossed since July 12, 2012 – in early trade.”
The real economics that have caught up with crude include a slowdown in Chinese GDP growth, which is no surprise to the blog following its visit to China last week. China’s GDP expanded by 7.7% in the first quarter of this year compared with 7.9% in the prior quarter. This is well below the 8.0% growth forecast in a poll of 12 economists carried out by AFP.
Chemicals markets have been presenting strong evidence of this slowdown since well before the Chinese New Year, with the post-Chinese New Year period underlining the secular changes taking place in China’s economy as the new government forges ahead with restructuring. There is now going back to the stimulus-fuelled growth of 2009-2010 and May-October 2012.
Disappointing US macro-economic data has also weighed heavily on crude during the last few days of trading. April data showed a larger-than-expected slowdown in New York state manufacturing as confidence also dropped amongst US homebuilders.
This underlines our concern that the US economy faces long-term structural problems that have yet to be resolved. For example, if you include discouraged workers, the marginally employed, and the workforce most impacted by the 2008 downturn, the real US unemployment rate is 14.3% rather than the official 7.6%, according to Forbes.
The Euorozone is, of course, also hardly out of the woods.
Returning to crude oil, we agree with fellow blogger Paul Hodges when he argues that there is another factor in play here: The aggressive Japanese stimulus programme has supported the US dollar, thus reducing the need of pension funds to invest in crude as a hedge against a weaker greenback.
Plus, as we said on 4 April, crude supply remains long.
“Meantime, chemical markets are locked in ‘wait and see’ mode. Q2 has not seen any major increase in demand, so buyers are reluctant to push purchase prices lower as this would merely devalue their own inventory,” said Hodges.
“Similarly producers long ago abandoned hopes of gaining market share, and are content to maintain the status quo.
“If oil prices start to [further] slide, however, these dynamics will clearly change. Naphtha fell a further 6% last week, and is now down 14% on its high a month ago. This is an astonishing move, at a time of supposedly peak demand, and highlights the potential weakness ahead as we go into the quieter summer months.”