By John Richardson
THE $30 a barrel price of crude at or below which some Asian naphtha cracker operators could be forced to exit the business is an increasing possibility.
Here is why:
- This January’s stockpile of crude in the US is the highest for more than 80 years, said the US-based Energy Information Administration yesterday.
- Refineries in the US that have suffered outages are likely to remain shut down until after the spring maintenance season. This will add to the demand that was already going to be lost as a result of scheduled shutdowns.
- It has been a very mild winter in the US and if the weather stays mild, this would be a further negative for consumption. In its December 2014 report, the Paris-based International Energy Agency (IEA) warned that OECD stocks could soon “bump against storage capacity limits” if there was a mild winter. And last week, the IEA in its January 2015 report issued another warning about rising inventory levels.
- The number of crude super tankers heading to China reached a nine-month high last December. This was at the same time as hedge funds gambled heavily on a rebound in crude: Data from the Intercontinental Exchange showed that funds had accumulated on-paper positions equivalent to more than 140 million barrels of crude – a level last seen when prices were near $105 a barrel in July. Oil prices still fell in December despite this support to pricing. And so please factor in what might happen to the market now that this support is very unlikely to be repeated.
- The IMF has revised down its forecasts for global growth for 2015 and 2016, as China’s economy continues to decelerate.
- Further downward pressure on oil might be exerted by the dollar gaining even more strength, in response to the Fed raising interest rates and the ECB’s new quantitative easing programme.
I hope that $30 a barrel doesn’t happen. But there is no point in pretending that this isn’t a real possibility. Contingency plans have to be put in place.
What really saddens me is that the risk of corporate failure could have been greatly reduced if more people had spotted the warning signs that Paul Hodges and I were flagging up from late 2013.
In an 11 November 203 post, I, for example, wrote:
If the broad direction is towards reform, less rather than more Chinese government stimulus will be in prospect. Chinese government stimulus is another sugar high that we think has helped to artificially boost oil, other commodity and equity prices since 2008.
A sharp retreat in oil prices, therefore, feels like a scenario that chemicals companies should build into their 2014 planning.
And then in a post on 17 December 2013 post, I wrote:
The US is now producing 8 million barrels a day of crude for the first time since 1989. The chart above shows this production surge and the importance of the North Dakota field in the US oil revolution.
And what about the decline in demand for crude, and its products, caused by the ongoing and unresolved economic crisis in the West, along with ever-great fuel efficiency? US consumption of petroleum products is, for example, 10% below its 2005 peak.
Finally, also, to what extent has speculation supported crude-oil prices? Will some of the speculators head for the hills in 2014 on US Fed tapering and a slowing Chinese economy?
A strong downside scenario for oil prices must surely, therefore, be worth building into your 2014 planning process.
Following the outcome of China’s crucial November plenum, this led me to this conclusion on 30 December 2013:
2014 is likely to be another year of declining GDP growth [in China]. The economy expanded by 7.7% in 2012 and is expected to have grown by 7.6% in 2013, which would represent the slowest rate of expansion since 1999. All the indications are that this trend will continue into 2014 as a result of economic rebalancing.
Throughout last year, I then kept track of the impact of economic reforms in China and what they meant for global growth – and for oil and commodity prices.
And in a 6 October 2014 post I warned that central bank policies had created two illusions. I warned that once they were dispelled, oil prices would very likely suffer a further decline.
These illusions were:
1.) The illusion of a scarcity of supply.
2.) The illusion of a strong global economy, underpinned by unrealistic expectations of growth in China
So at the end of this post, I advised the following:
Build one scenario for 2015 where oil supply remains longer than most people think.