China and Iran Reshape Oil Market Thinking

Business, China, Company Strategy, Economics, Oil & Gas

Oilpricelongterm

By John Richardson

ON Monday, I discussed how a generation of analysts have grown up never having experienced a prolonged period of weak economic growth in China.

Because these analysts were unable to imagine a sustained downturn in China, they bent their theories to fit a set of facts that have consistently pointed to more difficult times ahead since as early as 2011.

The great news, as I again said on Monday, is that the consensus on China has finally shifted to where it could and should have been back in 2011.The catalyst has been the decline in local stock markets. A good example of this shift in the majority view was a 14 July article in the Wall Street Journal, which concluded with this  apposite statement:

The easy economic gains are over. Now there is no choice but to begin the hard work.

The same process is now taking place in oil markets, where the catalyst will be the historic nuclear deal between Iran and the West.

A whole generation of analysts have grown up with the notion that the natural price of crude is around $100 a barrel.

What these analysts failed to spot several years ago was that misplaced US Fed economic stimulus encouraged too much investment in physical oil supply, and too much gambling by paper-market speculators who went perpetually long on crude.

They were equally unable to grasp that supply wouldn’t automatically shut down when prices fell, and so they assumed that if prices ever fell much below $100 a barrel, production cutbacks would soon return prices close to this magic level.

Then when they realised they had got this wrong, they shifted ground slightly and started to argue that the New Normal for oil prices was $60-80 a barrel.

But now we have the Iran deal, which by itself is significant for supply, as the Guardian pointed out in another 14 July article when it wrote that:

In terms of Iran’s ability to sell crude, I think that is where we will see the most immediate loosening up of restrictions. Iran has between 40 and 50 million barrels of crude at sea.

 Expect this crude to come to the market in short order. They will start competing fiercely to regain market share that they have lost to their Persian Gulf neighbours.

Unfortunately for Iran the timing couldn’t be worse. Oil prices are depressed and already there is a glut of oil on the market. Adding Iran’s crude will put further downward pressure on oil prices.

But even if there had been no nuclear deal, oil supply was already very long. Last Friday, for example, the International Energy Agency said the following:

It remains that the oil market was massively oversupplied in 2Q15, and remains so today. It is equally clear that the market’s ability to absorb that oversupply is unlikely to last.

Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day. Something has to give.”

Thanks to Iran, I think people will now focus on all the issues surrounding supply.

As for the demand side of the story, this is where we come in full circle: It was the entirely false notion that nothing was wrong with China’s economy that also helped to keep prices at around $100 a barrel.

So, as more and more people grasp the realities of supply and  demand, I can see no reason why prices will not head back towards their historic average of $30 a barrel.

PREVIOUS POST

China: A Brief History Of Denial

13/07/2015

I’ll be posting less frequently this week – today, obviously, Wednes...

Learn more
NEXT POST

The Great "Middle Class Myth" Further Exposed

16/07/2015

By John Richardson A GOOD argument is only a good argument if it is backed up by...

Learn more
More posts
Global polyethylene demand in 2020 at risk of 2.4m decline because of coronavirus
19/02/2020

By John Richardson I AM a bit confused this morning following some excitement about the Chinese deci...

Read
Coronavirus: Global polypropylene demand in 2020 could fall by 2.6m tonnes over last year
17/02/2020

By John Richardson SOME GOOD news might be that official Chinese state media announced that the numb...

Read
Coronavirus threatens 2.9m tonnes of China PP demand as uncertainties increase
14/02/2020

By John Richardson THE RUMOURS travelled around my contacts, and I am sure many of your contacts, fo...

Read
More than 3m tonnes of Chinese polyethylene demand at risk from coronavirus
08/02/2020

    By John Richardson THE GOOD news is that medical experts believe the novel coronavirus...

Read
Coronavirus: Global polyester chain faces major production cuts, shortages and cost increases
07/02/2020

By John Richardson A GREAT example of the extent to which global supply chains are exposed to China ...

Read
Coronavirus: Global polyolefins cutbacks seem inevitable on major China demand loss
05/02/2020

We all hope that the coronavirus outbreak will soon be brought under control, that’s the main ...

Read
Why coronavirus will be a much bigger deal for petrochemicals than SARS
02/02/2020

By John Richardson THE WORLD was very different in 2003 when SARS struck. Back then, China accounted...

Read
China 2020 polyethylene demand 4.1m tonnes lower on single-use plastics ban and coronavirus
27/01/2020

By John Richardson CHINA was supposed to be the one polyethylene (PE) market we could all depend on ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more