Thanks to a slumping Chinese economy and a damaging trade war between the United States and China, oil prices have hit a six-month low. Oil supplies are at record levels, thereby cutting demand. Yet it’s not just a numbers game.
In February 2015, in early trade on a Tuesday morning, I talked about this time of year with Raymond James’ Kim Kyung-Hun and Monex’s Kyle Bass. They were coming off some big run-ups on bullish commentary. We’ll see if history repeats itself in this case. What will end up making or breaking what has become a much more soggy market?
We put Kim and Kyle’s views on the line by pointing our viewers to their recent reports, which can be accessed here and here. Both men are in no way invested in energy stocks. Kim and Kyle prefer long-only stocks, while I am heavily bullish.
Kim: Oil is now down around $50, having plunged around 20% since mid-March.
Kim: As we shared last week, the global supply glut is sure to re-appear this summer. We wrote that Saudi Arabia will go much lower in price to gain market share. It has already poured so much downward pressure on prices since 2015 that production from the United States alone has been enough to close the gap. Just last month, Oil Price UK reported that U.S. output had exceeded that of Saudi Arabia and Russia. The U.S. has added capacity of 1.3 million barrels per day, the equivalent of the rest of the world producing even more each year. While the EIA has forecast that U.S. production will plateau or begin to shrink a bit in coming years, the International Energy Agency says output could rise by another 30%, especially if a sustained rally develops in the global economy. Demand is also set to grow.
Kyle: The record run-up in oil prices is due to runaway growth in demand and a strengthening global economy. The U.S. government is forecasting that the global economy will grow 3.5% this year and 3.6% next year, faster than we’ve seen in nearly three decades.
Kyle: That global GDP growth is being fueled in part by the emergence of China. The world’s most populous nation grew 6.9% last year and is projected to top 7% this year and next. Developing nations like China, India and others are pushing per capita consumption higher and pushing us toward the limits of global supply. And there’s enough crude and refined oil product to meet that demand. The Energy Information Administration recently pegged the crude oil capacity of the seven oil-producing countries IHS said could increase by a whopping 2.2 million barrels per day this year alone. That’s right, we need the Permian boom to keep supplying us with crude for those price spikes. They also project global oil production to rise 1.3 million barrels per day in 2018 and 2.1 million barrels per day next year.
Kyle: There’s more. If the world economy doesn’t weaken because of record inventory, and if the price of Brent hits $70 per barrel, oil exporters like Saudi Arabia will act to raise prices. That was the case in 2014 and ’15. When they were short oil, the kingdom threatened to sell some of its huge reserves to pay for production cuts, which really drove down prices. In late 2014, they did as much as they could to raise prices. Saudi Arabia’s actions helped drive oil prices down to a record low.
Kim: According to the IEA, there is near-record global oil storage capacity. Despite all that, prices have been continuing to slide, falling below $50 a barrel again on Friday after news that U.S. oil inventories grew by 9.2 million barrels in the last week. That’s slightly above forecasts, but much higher than just two weeks ago. At 94.3 million barrels, there’s not much upside from here. North America is the world’s top oil producer, and that gets a good deal of attention. But China is one of the world’s biggest oil consumers. Last year, it consumed more than 10 million barrels per day of petroleum products. As far as demand for oil goes, China wants another $100 per barrel. The world’s third-largest economy now accounts for 10% of the world’s demand, and it’s going to continue to grow for years. As I mentioned before, IHS expects worldwide oil consumption to increase by more than 1 million barrels per day this year and 1.3 million barrels per day next year.
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