As Oil Rises Demand Weakens

CrudeSpotPrices.pngBy John Richardson

A barrel of Brent crude oil cost $88.49 a barrel in June. Yesterday, it was trading at $116.55 a barrel.

In the intervening period the global economy has substantially weakened, most notably in the case of China, as the problems that have been identifiable since late last year have become widely recognised.

China’s official GDP (gross domestic) product growth is likely to be around 7 percent this year, close to the government’s targets, says Glenn Maguire, chief economist at the Sydney-based economic consultancy, Asia Sentry Advisory, in this video.

But he warns that real, underlying GDP growth could fall to 3-5 percent in 2012, reflecting what the polymer markets are telling us.

And yet the oil price has rallied, resulting in the Group of Seven industrially advanced nations urging oil producers in late August to “increase their output to meet demand”.

The problem, as China illustrates, however, is that the oil-price rally has little to do with demand. As we discuss in Chapter 3 of our book, Boom, Gloom & The New Normal, oil prices are about speculation. The increases over the last few days are, for example, about excitement that the Fed might be about to give speculators another free lunch to gamble with even more stimulus money.

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