*Record bets on prices falling further
11 January 2016, Houston — Oil prices slumped back towards their lowest levels in almost 12 years this morning and traders are placing record bets on prices falling further in the coming months.
International benchmark Brent crude gave up gains made at the end of last week, when it recovered to a little above $34 a barrel at one point, after more evidence emerged of waning demand in China, one of the biggest oil consumers in the world. The price dipped as far as $32.50 a barrel, around 40 cents above the near 12-year low of last week.
Chinese markets crashed more than 5 per cent overnight, triggered by a 46th consecutive month of deflation in “factory-gate” prices for goods. This is suggestive of weak demand that would signal slowing growth and weaker oil consumption, adding to fears resulting from the depreciation in the renminbi, which makes dollar-denominated oil and its derivative products more expensive.
Reuters cites data showing that purchases of oil had already begun to fall in China last November, the last month for which data is available. In a note late last week, Barclays said that implied oil demand had fallen 4.7 per cent month-on-month in November, or 2 per cent compared to the same month in 2014. The bank expects further declines this year.
Slowing demand adds to concern over a global supply glut at a time when output is exceeding purchases by around one to two million barrels a day, hitting prices as a result. This is before the increase in Iranian production expected in the near future and in the wake of a diplomatic schism between Iran and Saudi Arabia that has knocked hopes of a deal to limit exports.
As a result of all of this, speculators are convinced the price is only likely to head down. Amid predictions that prices could fall to $25, $20 or even lower, institutional investors have increased their net short position – bets that prices will fall – to an all-time high.
Some bullish analysts, however, suggest the oil price may, in fact, have stabilised and that improvements in the US economy will prevent further sharp falls. “The strong job data from the US last week should help keep the prices from bleeding further,” Daniel Ang, a Phillip Futures energy analyst, told the Wall Street Journal.