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A Signal of Strong Short Term Demand in Oil Markets

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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Central Bank Action Could Rescue Oil Demand

Global oil demand growth has undoubtedly slowed down this year, but loosening monetary policies from major central banks could help oil demand growth pick up from the current levels, Virendra Chauhan, oil analyst at Energy Aspects, told CNBC on Monday. 

“People are looking at the China-U.S. trade war and that’s what’s driving the price of oil right now,” Chauhan told CNBC in an interview.

The demand side is the driver, because if we look at the supply side, oil supply from OPEC is down by 2 million bpd, and that’s the steepest decline in a decade, and yet, “oil has gone nowhere” in the past month, Chauhan said.  

Despite the huge U.S. inventory draws and the continued unresolved tensions in the Middle East, oil price gains were constrained last week by continued concern about the health of the global economy going forward.

“Demand has undoubtedly slowed down and a lot of that has to do with the China-U.S. trade war,” Chauhan told CNBC today.   

The number one concern from investors and clients to whom Energy Aspects speaks is that the U.S.-China trade war will start affecting global supply chains and therefore, low demand is here to stay, he added.

However, demand may soon pick up from current levels thanks to loosening financial conditions by central banks. Such policies are supportive for risk markets, equities go up, and “oil kind of follows into that,” Chauhan told CNBC.

The combination of slowing demand and U.S. production growth is the main reason why oil prices haven’t shot up in the wake of increasing tensions in the Middle East and in the Strait of Hormuz, he said. Related: Growing Fear Of Global Economic Slowdown Caps Oil Price Gains

“Today, that 2-million-bpd loss is almost offset by growth from the U.S. and the net effect is zero on oil, because any loss from the Middle East can be made up from the U.S.,” Chauhan concluded.

Earlier this month, Morgan Stanley’s global oil strategist Martijn Rats said that the oil market has changed so much over the past five years that fast-growing non-OPEC oil production limits oil price gains from a spike in tensions in the Middle East.

“There is a difference in the oil market this time around because non-OPEC is simply growing so fast. That is the real game changer and that’s why the price action is relatively benign,” Rats told CNBC last week, commenting on the muted price reaction to Iran seizing a British tanker in Middle Eastern waters the previous week.

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By Tsvetana Paraskova for Oilprice.com

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