All of a sudden the oil markets are faced with a new twist. Until last week, the focus had been on lowering Iranian output and its impact on global oil market’s general equilibrium.
In the wake of changing global economic scenario, the attention has now shifted to demand destruction.
The Organisation of Petroleum Exporting Countries (Opec) is on guard, as oil prices plunged about 5 per cent last week paralleled by a sell-off in global equity markets reinforcing worries about crude demand growth.
Growing signs about slowing global economy are taking steam out of oil markets. In a sign of the changing times, hedge fund managers too accelerated their profit- taking in crude oil and refined fuels. As confidence in the previous price rally faltered, markets fell. Hedge funds cut their combined net long position in the important petroleum futures and options contracts by 133 million barrels in the week to Oct 16.
Fund managers have cut their combined position by a total of 187m barrels in the last three weeks after raising it by 196m barrels in last five weeks. Evidence of a slowdown in China is also getting apparent; auto sales fell by 12pc in September.
A strong dollar is another source of trouble for the global economy, while the Fed has hiked rates multiple times and is expected to continue on that course.
The US housing market is also starting to flash warning signs. Higher rates are pushing homes out of reach for some prospective buyers. For the week ending on Oct 12, mortgage applications dropped by 7.1pc.
Further, economic headwinds are deflating also oil markets. The emerging demand pattern is a sign of concern. The prospect of weaker-than-expected economic growth is beginning to impact the global demand scenario – despite supply pressures from upcoming Iran embargo.
Opec and the International Energy Agency have lowered projections for growth in global demand. Trade war and emerging gloomy financial scenario have dimmed the global economic growth outlook for 2019. A Reuters poll of economists highlighted that the US-China trade war and tightening financial conditions would (and not could) trigger the next downturn.
Opec in its Joint Ministerial Monitoring Committee meeting was blunt in highlighting the scenario. “The committee expressed concerns about rising inventories in recent weeks and also noted looming macroeconomic uncertainties which may require changing course.”
The bearish sentiments were also echoed by Saudi Opec Governor Adeeb Al-Aama. Talking to Reuters, he pointed out that markets could be oversupplied in the fourth quarter as inventories rise and demand slows, emphasising that KSA will “mirror” such changes in its production.
Expressing concerns, he said: “Growth risks are a concern; particularly in emerging countries ... we are aware that oil demand responds to global macroeconomic factors and will be responding with our partners proactively”.
He added: “KSA produces only what its customers ask for, not more.
Yet, growing clouds on the global economic horizon is a reality. And when Saudis say they need to balance their output to the lowering demand, let’s concede they have a case to argue.
Published in Dawn, October 28th, 2018
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