RIYADH: Crude markets are in for some battering. With China struggling and Europe still on its heels, analysts are doubtful that global demand will continue to justify, in near future, the crude prices of around $100 per barrel.
China has been the major bright spot on the otherwise wobbling global economy -- for some years now. It has helped keep a floor on most commodity markets. Yet the massive Chinese engine is slowly and gradually cooling down. China's crude-oil imports fell in the first half of 2013, marking the first January-June contraction since the depths of the financial crisis in 2009.
China imported 138 million tonnes, or an average of 5.6 million barrels a day, of crude in the first half of 2013. This was 1.4 per cent less than in the first half of 2012. In contrast to this downturn, China's crude imports had risen by 7pc in the first half of 2011 and 11pc in January-June 2012.
Amid low inflation, Chinese economic data also reported exports contracting by 3.1pc in June, marking their first drop in 17 months. While imports also fell 0.7pc, commodity imports took a steeper tumble, contracting 5.2pc.
China's gross domestic product growth in the first quarter of 2013 also slowed to 7.7pc from 8.1pc a year earlier. Some analysts estimate that second-quarter GDP growth will be even slower, at 7.5pc. Nomura’s economic research team suggests there is 30pc probability that the China’s GDP would drop below 7pc in the second half of the year.
And in the meantime, the International Monetary Fund is forecasting slower global growth in 2013 and 2014, warning of a more protracted recession in Europe. The global economy is now anticipated to grow at 3.1pc this year, down from the April projection of 3.3pc. In 2014, the world economy will grow at 3.8pc, compared with an earlier forecast of 4pc.
The troubled eurozone also continues to add to the worries of the markets. It is now expected to contract by 0.6pc this year, compared to the April forecast for a 0.4pc decline. The IMF is also projecting an economic slowdown in key developing economies such as Brazil. The Fund has also lowered its forecast for the United States.
Analysts now underline that oil at $100 a barrel helped attract the huge sums of money that has made possible the shale revolution in the United Sates, oil sands development in Canada, and ultra deep water production from the Gulf of Mexico and offshore Brazil. It has also spurred conservation. US vehicles are 23pc more efficient than they were in 2007. Throw in rising production from Iraq and slowing Chinese demand growth, and it is possible the world will soon be, once again, awash in oil.
But all this could be in for a change. “It would be a mistake to assume that the oil price euphoria of 2007-2008 will not, at some point, be followed by a long-term adjustment similar to the 1980s oil price collapse,” Amy Myers Jaffe, executive director of energy and sustainability at University of California, wrote in a blog post. She thinks oil between the $50 and $70 range will be the new norm in three to five years, and even sees $30 a barrel if the market over-corrects.
Citigroup has a current price target of oil in the $80-90 range by the end of this decade, citing all the new production and greater emphasis on conservation.
Trevor Houser, an analyst at the Rhodium Group, also thinks oil prices will fall, citing a Bloomberg poll showing the median oil price projection going from $108 in 2014 to $95 in 2017. He points to the futures market, where oil for 2017 delivery currently trades for under $89 a barrel.
Are we in for another round of price crash? Indeed, there are many other variables impacting too -- including the global geopolitics. Yet if current signals are to be taken into account, price correction could just be round the corner -- despite the current spike.