Why crude oil is getting crushed

Photo by the Texas Energy Museum/Newsmakers

Nymex crude fell 3.1% last night, taking the price to just $41.60 a barrel, the lowest close since August 26, when prices were recovering from the fall to $37.75 just a few days before.

The selloff is being mirrored around the world. Brent crude futures, and Tapis oil in Singapore have been similarly weak over recent weeks.

Nymex is a long way from the $51.03 it traded at just a month ago, and even from the $48.36 level it was at earlier this month.

What’s happening is that traders are worried about relative weak global growth and with no sign that OPEC, and the Saudis in particular, will slow production, that the supply-demand imbalance will persist and push prices down.

This week the OECD said growth in 2015 is going to be the weakest since 2009. Back then Nymex crude was trading around the range it is now, so the price is not entirely inconsistent with the state of global growth.

Ray Attrill, NAB’s global co-head of the currency strategy team said the state of global growth, or at least opinions about China’s place in the growth equation, are one reason commodity markets were hit so hard last night.

In a note to clients today Attrill wrote that Chinese new loan data released last night had impacted on sentiment in commodity markets. It showed:

New CNY loans slumping to Y514bn from Y1050bn in September, with broad ‘Total Social Financing’ credit growth even weaker at 477b down from 1302bn. There is a suggestion this is partly related to local governments switching to cheaper forms of (bond) finance, but the news has nevertheless played to concerns about aggregate demand and commodity markets did take notice.

That’s vitally important to perceptions about the efficacy of Chinese monetary policy in the months ahead.

Earlier this week disappointing trade and inflation data out of China called into question the state of Chinese growth both now and going forward. But, for the most part traders and investors feel comfortable that the PBOC is now more likely to ease. That’s supposed to kick growth a long, put a floor under weakness and get the economy moving at a faster clip.

But what Attril is implying, by referencing the impact of weaker-than-expected new loans data, is that monetary policy traction in China is weaker than it was. Lower PBOC interest rates and the release of cash from bank balance sheets into the economy by RRR cuts is all well and good but it people don’t want to borrow or banks don’t want to lend then monetary policy’s effectiveness is diminished.

It’s the point Linnette Lopez made, noting that China is experiencing the dismal effects of the law of diminishing returns.

But there is more to this sell-off than just the state of global growth. It’s how that global growth, which implies lower demand, interacts with supply from the world’s oil producing nations and how that then feeds back into prices.

OPEC’s decision to keep on pumping, even as prices for crude fall, is causing some pain in the Middle East. The Saudis say they’ll keep pumping through the pain, but the oil minister from Oman (not an OPEC member) was scathing in his critique of that approach.

Perhaps it’s one of the oil market’s great own goals but selling accelerated after Omani minister Mohammed bin Hamad Al Rumhi said “this is a commodity that if you have one million barrels a day extra in the market, you just destroy the market”. He added that “we are hurting, we are feeling the pain and we’re taking it like a God-driven crisis. Sorry I don’t buy this, I think we’ve created it ourselves.”

On the same day, as if to underscore the pumps won’t be slowed any time soon, the Kuwaiti oil minister said what everyone else is thinking – unless oil producers “work together” (read “Saudis reduce production”), prices will remain low.

Combine slower growth, some prospect that Chinese monetary policy traction is slipping, and facing diminishing returns, and you can see why traders have been so focused on US oil inventories.

Last night the EIA announced a build of more than 4 million barrels in US stockpiles. That’s more than four times what was expected.

This chart from Westpac’s markets team’s Twitter account puts last nights increase, and the recent surge in inventory’s into sharp relief.

Source: Twitter Screenshot

It’s not hard to see why oil has been crashing. The question now is where will it stop.

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