China, Oil And OPEC – Do We Have A Bottom In Crude Oil?
AllFXBrokers | Mar 30, 2016 04:08AM ET
Falling oil prices over the past few years have rattled many economies. While putting pressure on the budgets for oil producing nations, the lower oil prices, which are a much needed break for oil importers, have seen inflation staying weak. They also exposed the cracks within the OPEC and non-OPEC countries, with Saudi Arabia at the helm, pumping oil at record levels. Clearly, supply has outstripped demand, especially at a time when the global economy is showing signs of cooling.
China – Second largest oil importer, but demand slows
China is the world's second largest consumer of oil following the US. In December 2015, China's oil imports surged strongly as the country imported close to 33.19 million tons of oil, a 9.30% increase in imports compared to a year ago. Overall, oil imports increased 8.80% in 2015 compared to 2014, after the country turned a net importer since early 1990s.
However, things might change as 2016 unfolds, as slowing demand in China has seen economic forecasters predicting that China's economy would grow at a pace of 6.50%, the slowest in nearly 25 years. This in turn could keep demand for oil subdued, further adding to the woes of an oversupplied oil market. Oil prices are already down nearly 20.0% this year, currently trading at $32.38 a barrel.
In 2016, it is estimated that China’s oil demand could grow 4.30%, compared to 4.80% a year ago, according to a report from the China National Petroleum Corporation (CNPC). The forecasts from CNPC are a bit higher than the International Energy Agency (IEA), which estimates that China’s demand for oil in 2016 could rise a meager 3.10%, down from the initially forecasted 5.60% growth previously.
OPEC oil cuts – baby steps
The recent declines in oil price have also remained a cause for concern for the OPEC countries. While over the past months there were rumors of coordinated oil cuts, which were met by quick dismissals from various oil producing nations (most notably Saudi Arabia), there was some progress made only last week, when Saudi Arabia, Russia, Qatar, Venezuela and Iran agreed to freezing oil production at January 2016 levels. The news saw oil prices briefly spike higher off the $26.5 handle to touch a high near $33.50. But the bounce was short-lived, as the markets soon realized that most of the countries had seen a peak in their oil production in January. Iran, which was initially hesitant to join the oil production freeze, managed to be convinced, as the country previously said that it would keep oil production at record pace in order to make up for its lost market share. Iran’s oil hit the markets only recently, after the US lifted its embargo following a successful nuclear program negotiation where Iran agreed to put its uranium enrichment on hold in return for lifting of economic sanctions.
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Oil - $20 a barrel
The $20 price mark has gained significance in recent times, after Goldman Sachs (NYSE:GS) famously forecasted earlier in December 2015 that oil is yet to seek a bottom. While it seemed a bit farfetched at the time, the current lows near $26 certainly make the $20 handle quite a possibility, unless of course, OPEC members agree to do more including scaling back production. However, it will be a matter of time considering that the surplus oil in the market will need to be consumed before the supply and demand balance out. However, the technical chart points to a different agenda, as shown below.
The weekly chart for crude oil is currently trading within a large descending wedge or a triangle pattern, with a bottom having formed near the $26.5 handle. At the time of writing, oil prices have reversed and a weekly bullish close above the $30 handle could see further upside with a test of resistance near $45 - $42. Further upside could gain momentum if crude oil manages to break this resistance, seeking $60 a barrel.
The upside bias in crude oil is further strengthened by the bearish divergence shown by the Stochastics oscillator, which points to a near-term correction.
Therefore, while it is too premature to say that a bottom has been formed in oil, there is scope for an intermediate-term uptrend to follow, which could see oil prices potentially move to the $45 - $42 resistance level. And of course, there is no saying that a decline below $30 could potentially speed up the dip to $20.
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