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Schork Oil Outlook: How China Hit Fuel Prices

What it Means to be a Global Economy...

Last Wednesday, the EIA released its latest Short Term Energy Outlook (STEO), a forecast of global supply, demand and prices. There is enough data for several reports, but key takeaways included WTI prices, which the EIA forecasts will average "about $83" this winter (October to March), before rising to $87 by Q4 2011. Did this take the wind out of the bulls’ sails?

"If the rate of global supply is outpacing the rate of domestic consumption, and prices are still expected to rise, someone has to pick up the slack."" -The Schork Report, Stephen Schork

On Wednesday, WTI was trading around a high of 88.21; by Friday, the low print came close to 84.50.

Much of Friday’s weakness was due to concerns that China could increase its interest rates, thereby cutting down demand from one of the world’s largest consumers. Consider that the STEO places growth of total global supply of liquid fuels (including biofuels and natural gas fuels) at 2.03% between December 2009 and December 2011. At the same time, the U.S. is projected to see its rate of consumption grow by just 0.11%.

If the rate of global supply is outpacing the rate of domestic consumption, and prices are still expected to rise, someone has to pick up the slack.

That burden seems to fall on countries like China, which sees consumption growth at a sharp 9.77%, and the former Soviet Union, which sees growth of 4.68% over the same period. This is demonstrated in today’s Chart of the Day (request here), which charts month-on-month growth/decline (smoothed with an MA over 12 months to account for seasonality) for the U.S. and China.

The difference is stark.

The STEO also cites “stronger-than-expected” growth in European oil demand during Q2 and Q3 2010 and high expectations for consumption from Brazil.

The STEO expects production from OPEC to increase by ~0.3 MMbbls/d and 0.5 MMbbls/d in 2010 and 2011 despite unchanged production targets in last month’s meeting. With surplus capacity expected to hover near 5 MMbbls/d (as compared to 1.5 MMbbls/d in 2008) it is not too surprising to hear that enterprising OPEC members will take advantage of all that capacity just lying around.

All told, we will be listening very closely for news out of China, including the latest Foreign Direct Investment data expected to be released today.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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