Oil prices sank further yesterday on reports that Chinese economy is showing signs of more weakness. According to official data, activity in China’s manufacturing sector contracted at its fastest pace in three years in August, reinforcing fears of a sharper slowdown in the world’s second-largest economy despite a flurry of government support measures. Even China’s services sector, which has been one of the few bright spots in the sputtering economy, showed signs of cooling, expanding at its slowest pace in more than a year.
The Chinese economic woes are dealing the biggest blow to oil prices. Prices, which were looking up on Monday, plummeted yesterday, settling eight percent lower. The market fluctuations are so bad that according to reports, the past few weeks have been among the most volatile in the modern oil market’s three-decade history. Prices plunged early last week as worries about China’s economic strength sent shivers through markets, only to bounce back fiercely as bearish traders rushed to cash in short positions. Traders again took flight yesterday after seeing the weak Chinese economic data.
The Chinese turmoil should awaken the global markets to some hard truths, the most important of which is that China cannot keep racking up double-digit growth rates forever. Secondly, when demand slows and company output slows, short-term, panic-driven measures by the government cannot provide a long-term solution. Oil-producing countries need to work more assiduously on diversification of their economies. On the one hand, the global market is witnessing a glut with more producers entering the market, and with more countries reporting new oil and gas discoveries, and on the other, the existing demand has been weakened by weak economic data. It’s a double whammy for which oil producers haven’t been prepared.
Oil markets are used to their fluctuations and a fall is usually compensated by a rise. But the current market realities call for a reorganisation of strategy. Even Opec, the organisation of oil producers, is feeling helpless and is forced to watch as a spectator. In the past, Opec was able to intervene in the market and push up prices with coordinated production cuts. Such cuts are impossible in a glutted market. Leading producers are worried about losing their current market share and Opec has been unable to come up with an alternative strategy.
While any rise in global demand is unlikely, the biggest problem is the persistent global supply gut, which is likely to worsen with the entry of Iranian oil.
The next few months are very crucial. If the market doesn’t show signs of a revival, oil economies will suffer huge damage. At the same time, hopes are very high about a correction in the market because it cannot remain depressed for a long time•
Oil prices sank further yesterday on reports that Chinese economy is showing signs of more weakness. According to official data, activity in China’s manufacturing sector contracted at its fastest pace in three years in August, reinforcing fears of a sharper slowdown in the world’s second-largest economy despite a flurry of government support measures. Even China’s services sector, which has been one of the few bright spots in the sputtering economy, showed signs of cooling, expanding at its slowest pace in more than a year.
The Chinese economic woes are dealing the biggest blow to oil prices. Prices, which were looking up on Monday, plummeted yesterday, settling eight percent lower. The market fluctuations are so bad that according to reports, the past few weeks have been among the most volatile in the modern oil market’s three-decade history. Prices plunged early last week as worries about China’s economic strength sent shivers through markets, only to bounce back fiercely as bearish traders rushed to cash in short positions. Traders again took flight yesterday after seeing the weak Chinese economic data.
The Chinese turmoil should awaken the global markets to some hard truths, the most important of which is that China cannot keep racking up double-digit growth rates forever. Secondly, when demand slows and company output slows, short-term, panic-driven measures by the government cannot provide a long-term solution. Oil-producing countries need to work more assiduously on diversification of their economies. On the one hand, the global market is witnessing a glut with more producers entering the market, and with more countries reporting new oil and gas discoveries, and on the other, the existing demand has been weakened by weak economic data. It’s a double whammy for which oil producers haven’t been prepared.
Oil markets are used to their fluctuations and a fall is usually compensated by a rise. But the current market realities call for a reorganisation of strategy. Even Opec, the organisation of oil producers, is feeling helpless and is forced to watch as a spectator. In the past, Opec was able to intervene in the market and push up prices with coordinated production cuts. Such cuts are impossible in a glutted market. Leading producers are worried about losing their current market share and Opec has been unable to come up with an alternative strategy.
While any rise in global demand is unlikely, the biggest problem is the persistent global supply gut, which is likely to worsen with the entry of Iranian oil.
The next few months are very crucial. If the market doesn’t show signs of a revival, oil economies will suffer huge damage. At the same time, hopes are very high about a correction in the market because it cannot remain depressed for a long time•
