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Oil prices, Russia, open new fault-lines in the ‘Ring of Fire’

Economic growth
By Paul Hodges on 18-Dec-2014

RingOfFire Jun14

One by one, the fault-lines are opening in the debt-fuelled ‘Ring of Fire’ created by the central banks.  First published in June, the map above highlights where I believe these fault-lines run:

  • China is the epicentre of the approaching earthquake – its manufacturing industry is now contracting 
  • Russia is in financial crisis, with interest rates at 17%, the rouble plunging in value, and recession underway
  • Middle Eastern stock markets have fallen for over a week, and were down 5% yesterday after 7% on Tuesday
  • Australia/S Africa’s mining-based economies are suffering badly – iron ore prices are at a 5-year low

And, of course, oil prices continue to collapse as I have been forecasting since August.  Brent reached the $70/bbl level earlier this month.  It now looks set to fall to $50/bbl.  After that, China seems to be the key to any further downturn:

  • Asian producers and traders now have large inventories of almost every oil-related product
  • Buyers have simply stopped buying in recent weeks as prices have collapsed

So the question is whether China’s demand will now increase in January, before markets close for Lunar New Year in mid-February.  A lot of money is now riding on this issue.

If China’s demand does not return, then prices will almost inevitably fall further, opening the fault-lines into Western markets.  Asking prices for London houses are already sliding, and were down 5% in November alone.  Plus, of course, there are the $tns of debt created in energy markets in the belief that prices could never go below $80/bbl.

In view of the importance of the oil price issue, and following many requests, I have updated recent posts into a new ‘pH Report’ Research Note.

Titled “Oil prices continue bouncing down the stairs to lower levels”, its analysis suggests prices will continue falling to $50/bbl, and may well end up returning to the historical price range of $25/bbl – $40/bbl:

  • The International Energy Agency said on Friday that H1 2015 was unlikely to see any major supply reductions, or demand increases, and warned OECD stocks could soon “bump up against storage capacity limits”
  • China’s demand growth is slowing fast as President Xi implements his “New Normal” economic policy, which is focused on bursting the lending bubble that has driven China’s demand since 2009
  • High oil prices have seen producers lose major market share to gas, heightening the potential that their oil reserves will end up being left in the ground, as happened to coal in the past
  • Saudi Arabia and the GCC countries risk losing their US export position, and hence their oil-for-defence agreement with the US, as Canadian and domestic volumes continue to increase

Please click here to download a free copy.