Does weakening Chinese growth compel lower oil prices?
Markets overreact to bad news
Richard Thaler won the Nobel prize for advancing market theory with evidence that investors over react to bad news and under appreciate positive trends. His groundbreaking work followed advances in understanding human behaviour by the late Amos Tversky and Daniel Kahneman.
There is mounting evidence of weakening economic growth in China. At this point, there is scant evidence of a decline in economic activity, just a slowing expansion. It matters.
China consumes ~14 million barrels of oil a day and produces about 4 million barrels, importing 10 million barrels a day. Oil use in China is highly correlated with economic activity. Economists are ratcheting down their forecasts of China growth and now see 4% growth instead of 5%. Four percent GDP growth in China will lead to higher oil consumption, not lower.
Oil prices fell 5% overnight based on China fears. Unless the China slowdown turns into a major recession in China, the market reaction is an over-reaction and presents opportunity for energy investors. A greater risk is an Iran nuclear deal which could bring several million barrels a day of oil back into the market.
The global shortage of fossil fuels is not going to go away quickly. European natural gas users are switching to oil for power generation owing to the extreme natural gas prices in Europe. That switch alone can add at least 500,000 barrels a day to oil demand.
Both OPEC and the IEA see oil demand growing by 2.1 million barrels a day next year based on reports released yesterday.
A global recession is still possible and that will have an immediate but short term downward impact on oil & gas prices. Absent any material increase in capital going into expansion of fossil fuel production, the global energy shortage will get worse in the next few years and energy investors should stay calm and avoid the temptation to bail out. As an old pilot, I know that a bad landing is better than a parachute, parachutes don’t always open and landing in the Atlantic in winter doesn’t end well. A decline in world oil prices is more opportunity that risk in my opinion.
Interesting you should mention the Iran nuclear deal.
Last week, the EU were proposing new terms - a way out for Iran & to start trading oil again (the EU are desperate and will surrender to whoever).
Then, the next day, Salman Rushdie was attacked - I'm not suggesting anything, but gosh, the timing!
You would think that would puts the dampers on the prospects for cutting a deal now?
Meanwhile, the leftist media say there is no indication of a motive for the attack - SERIOUSLY - this is where we are with the media cover-ups in 2022!
One more bullish factor: end of US SPR releases in October (by chance just before the elections). Maybe it is even better that oil stays at 90 USD, not higher: O&G companies can avoid being scapegoated by the leftist governments in US&EUU.