China the big winner from slide in oil prices

Brent has averaged around $110 per barrel over the past three years, and this sharp fall can be explained by both supply and demand factors, according to UOB Global Economics and Markets Research.

China, one of the biggest oil importers, is the obvious winner from this development.

Oil prices around the world have continued to fall after the Organisation of the Petroleum Exporting Countries’ decision last week to stand firm on its production volumes despite lower global demand dragging down prices substantially. 

The surge in global production, with increases in Libya and Angola and the uninterrupted supply from Iraq despite the war with Islamic State, has pushed up Opec’s total output to slightly under 31 million barrels a day, or 352,000bpd more than this time last year, UOB said. 

Swelling US production on the back of its “shale revolution” has also fundamentally changed the global oil equation, resulting in excess global supply at a time when demand has slowed because of an uncertain world economic recovery. 

The International Energy Agency has estimated that the pace of expansion in oil demand for 2014 and 2015 will be weaker than expected. Demand in 2014 had been expected to rise by 700,000bpd to 92.4 million barrels. However, the latest prediction is 200,000bpd less than its previous forecast, while the demand for next year is expected to come in at 93.5 million barrels per day, according to the research report. 

 Reorient Group, and investment firm in Hong Kong, comments that China and other countries in Asia have been the major buyers of crude oil for the past several months, building up their strategic oil reserves. If China increased imports by 700,000bpd, its reserves would rise to 91 million barrels per day in the next 130 days. 

If Saudi Arabia continues to maintain production at the present levels, excess supply will continue.

UOB expects the lower oil prices in Asian currency terms will help reduce the inflation premium as well as benefiting growth through improvement in disposable incomes, while bond markets’ pricing of this favourable dynamics should lead to lower long-term yields. 

Oil-price volatility will also bring about short-term spikes in correlation between oil prices and Asian currency rates. Conversely when prices have stabilised, the recent run-up in positive correlation with Asian rates should start to break down, and over the longer term, the impact on inflation and growth will depend on the sustainability of prices.