Chinese puzzle

THE days of relying on Asia’s emerging markets to underwrite the bull case for oil prices may be done for now and the outlook for China is arguably more difficult to read than it has been for some time. Paul Garvey in Hong Kong
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Staff Reporter

That is the view that can be formed from two recent analyses of the global oil market by investment banks Credit Suisse and Deutsche Bank.

Both highlighted some of the challenges faced when trying to predict the direction of the oil price right now.

China’s slowing growth rate has increasingly become a cause for consternation.

That is on top of the ongoing fiscal mess in Europe having a real impact on demand in that part of the world, the tensions in the Middle East constantly threatening to boil over and the unprecedented and unpredictable events taking place in North America’s rapidly expanding shale oil sector.

Both Credit Suisse and Deutsche used their analyses to trim their price forecasts for this year, with both banks having overshot the mark on their earlier estimates.

Credit Suisse, having originally forecast Brent crude to average $US125 a barrel and West Texas Intermediate to average $112/bbl, is tipping those to average $104.35 and $90.58 respectively.

Deutsche cut its Brent forecast from $125/bbl to $110.

Part of the challenge facing the analysts at both banks is coming to grips with the role of China.

Yes China is still growing and yes China will keep growing for some time but there appears to be an increased feeling that the potent, generation-defining double-digit growth rates that helped drive the market in recent years have abated.

Credit Suisse, for example, expects Chinese oil demand to grow by 3.1% this year, which is down from the 12.1% growth witnessed back in 2010.

It is a similar story in the rest of Asia’s emerging markets.

Credit Suisse is forecasting demand out of those other Asian markets to grow by 2.8% this year, compared to the 4.5% growth in demand recorded in 2010.

The official gross domestic product growth numbers released by Chinese authorities last Friday can be cut both ways.

It can be taken as a sign that Beijing is successfully and deliberately guiding China towards a soft landing, ensuring a smooth and orderly evolution of the economy.

Or it can be seen as another sign the phenomenal Chinese demand growth we’ve enjoyed in recent years has well and truly peaked and is into a decline that will continue for some time.

Providing a little more food for thought – and offering more encouragement on the China picture – is China’s apparent stockpiling of oil this year.

According to Credit Suisse, China appears to have added at least 58 million barrels of oil to its inventories between January and May, with an estimated 26 million added in May alone.

Squirreling efforts like this can have a big impact on market dynamics and represent another wildcard in the market.

Against the backdrop of a supply and demand outlook that is causing analysts plenty of confusion, one of the few certainties is that the financial crisis in Europe will not be getting resolved any time soon.

The lingering European nightmare means any other oil price rallies that are not supported by real, certain fundamentals are unlikely to last too long.

So it leaves us back in the position where the bull case for oil will rely on unpredictable and unpalatable geopolitical shocks, such as a worsening of the ever-volatile situations in Iran and/or Syria.

Things sure were easier when we could just rely on China to buy more and more and more.

This article first appeared in ILN's sister publication

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