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Macroscope | Don’t blame China’s slowing demand for the fall in oil prices. Instead, look to US sanctions (and waivers) on Iran
- Neal Kimberley says lower prospects for the Chinese economy did not directly cause the recent drop in oil prices
- However, US waivers on its new Iran sanctions for China (and others) signalled the collapse of a central pillar of support, leading to fear in the market
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Fans of Game of Thrones know that winter is coming, but it has arrived early for traders who have been long of oil, with many having been frozen out of positions in recent weeks as the price of Brent Crude has plummeted from a four-year high of US$86 a barrel on October 3 to a close last Friday of US$66.76.
But why has the oil price fallen so quickly and how should markets interpret it? One explanation is that expectations of lower demand for oil have weighed on its price and, as US bank BNY Mellon wrote last week, “if we’re talking falling demand, then any conversation must start with China”.
China definitely does play a role in this story but tangentially. This oil price fall is not a market judgment on China’s prospects.
Certainly, the oil cartel Opec has been cutting its forecast for demand next year. While in July, it expected demand in 2019 to rise by 1.45 million barrels per day, by this month, it had lowered that expectation to an increase of 1.29 million bpd.
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