Why crude may see a bearish phase

Sharp contraction in Chinese GDP has shaved of oil imports and the market struggles to find another China

Global oil prices continued their upward spiral from July 2012. The momentum picked up in August 2012 with fundamentals turning positive on the back of demand reviving. After having languished in the previous months global oil demand in July 2012 increased 1.8 per cent over July 2011. Heightened speculative activity, drop in US crude oil inventory and hopes of QE-3 combined contributed to continued upsurge in crude oil prices during August 2012 too. Oil prices have always seen an upside whenever liquidity has been infused into the system.

When crude prices had tumbled after the heat of recession being felt during 2008,the first round of quantitative easing by the US had provided a strong trigger. Oil prices saw an upside of 140 per cent approximately till the end of the program, observe analysts. However, in the second round the upside was just 20 per cent approximately. Nevertheless the impact fizzles out as soon as the cheap liquidity vanishes from the system. This round of quantitative easing is no different, however the oil prices had already run-up in anticipation. Hence analysts feel that the crude prices from here may rather correct.

The bearish view now is also spiked by the slowing Chinese demand. Soumya Dixit and Kunal Shah at Nirmal Bang Securities in their report observe that China the second largest consumer of oil has reduced its oil imports by more than 30 per cent in the past four months following the sluggish growth in the country. China’s GDP contracted 0.5 per cent in the last quarter depicting the worst situation in the economy. Sharp contraction in Chinese GDP has shaved of oil imports and oil market still struggles to find another China. They add that even though Chinese economy would pick up growth momentum in the first half of 2013, due to the structural problems they do not expect any meaningful growth in oil imports from China.

The US’s efforts to increase its domestic oil production over past few years is in turn would thereby also not lead to a significant jump in oil imports from Middle East in spite of growing demand in US. Europe’s economic woes leading to austerity measures may also keep a tab on oil demand from Europe. Analysts feel developing economies which were the growth engines of the global economy needs lower fuel cost as most of them are battling with higher inflation which has paralysed the governments to take favourable steps to stimulate the economy. In the backdrop they feel that the oil prices have peaked out for next three quarters and any spike due to geopolitical tension or liquidity injections should be sold. They even observe that the WTI crude oil can drop and test the levels of $85-$82 a barrel in the next three quarters.