mangolfer

Will Crude Oil Break $100/Barrel?

From another SA article about China consumption

Where I find flaw in this China-Olympics theory is that the media makes it out to be that there are only two consumers in the world of crude: the U.S and China. Everyone says that this decrease in demand is thanks to the slow down in China to clean up the air before the Olympics. Did everyone forget that the rest of the world, including emerging markets like Russia, Brazil, and India, have NOT slowed down because of the Olympics? To add, China did not close down production countrywide, but only in Beijing and a few other small factory and port cities. Beijing is less than 2% (1.7% by my math in 2007) of China's GDP.

While the rest of the world (92% of energy consumption) continues to consume at its pre-Olympic pace, oil has fallen $35. Yet, CNBC won't stop talking about the impending hurricane of demand that will come from China. I disagree.

As I have already said, most of China is still consuming at its pre-Olympic pace too.

Let's do a little guestimation: China accounts for 8% of world oil consumption (1/3 as much as the U.S). Let's say that Beijing consumption has slowed 50% (it didn't). By limiting traffic, it is estimated that only 1/3 of the 3.3 million vehicles will stay off the road daily. Non-discretionary consumption should stay flat. So, 2% of 8% is 0.16% of world consumption, or approximately 138K barrels a day of consumptions. Going back to our 50% decrease in consumption number, Beijing purposely decreased its Beijing consumption by 69K barrels a day. There goes the ramping up thesis. 40 factories here and there don't significantly raise that number in the context of world supply.

My point is that China's actions have not significantly, or even marginally, cut demand. However, in the same time frame, Crude Oil has fallen from $148 to $113. To say that the slowdown in China is because of the Olympics is a canard. Furthermore, China has curtailed gasoline demand by raising prices 17% in late June and OPEC has increased supplies.

The Chinese tried very hard to piece together their country before the world arrived. It is arguable that the super spike we saw in oil was because China tried to complete in months what they should have built in years. Now, I will argue that progress (and consumption) will slow from here. Growth tends to slow post Olympics in host countries.