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Oil Markets Face Nightmare Scenario

Financial markets saw their worst…

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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Oil Prices Plunge On Fears Of Global Economic Slowdown

Oil prices plunged by more than 3 percent on Tuesday morning as rekindled fears of global economic growth slowdown put an abrupt pause to the oil price rally in recent days.

At 11:20 EST on Tuesday, WTI Crude was plunging 3.5 percent at $52.15, while Brent Crude was plummeting 3.12 percent at $60.78.

On Monday, oil prices were slightly up, still running on the Friday news of the drop in the U.S. oil rig count, although signs of a slowing Chinese economic growth capped gains. China’s economic growth data showed on Monday that its gross domestic product (GDP) grew by 6.6 percent in 2018, the slowest growth pace in almost three decades, since 1990.

“Slowing manufacturing activity in China is likely weighing on demand,” Singapore-based tanker brokerage Eastport told Reuters on Tuesday.

Slowdowns in industry emerge as the first indicators of a potential lower demand for oil and oil products, according to Eastport.

But then the weak Chinese data spread to South Korea on Tuesday. Data from South Korea showed that growth in its export-oriented economy slowed to 2.7 percent in 2018, which met estimates of the central bank, but was the slowest growth pace in six years.  

Related: The World’s Most Geopolitically Charged Pipeline

Even before concerns that a slowdown is spreading out of China, the International Monetary Fund (IMF) cut on Monday its forecasts for the global economic growth to 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s estimates and another downward revision after the lowered estimates in the October World Economic Outlook.

“Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook,” the IMF said.

The IMF doesn’t expect a recession, but “the risk of a sharper decline in global growth has certainly increased,” IMF Managing Director Christine Lagarde said on Monday.

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on January 22 2019 said:
    Price volatility is part and parcel of the economics of oil being the most important strategic commodity on earth and therefore is subjected to so many influences at any point in time.

    However, the IMF economists and many other economists around the world immediately rush to give judgements and new projections the minute oil prices change even by the lowest of margins. Sometimes, they tend to base their judgements and projections on fickle and unsubstantiated premises one of which is the continuous talk about a slowdown in China’s economy. China’s GDP grew in 2018 at a very healthy rate of 6.6% exactly as it was projected at the start of 2018. And is also projected to grow at a similar rate this year. So there was no slackening whatsoever in China’s economy.

    China achieved a trade surplus amounting to $327 bn in its trade with the United States in 2018. This is not a sign of a slowing down economy.

    Moreover, China’s oil imports rose in 2018 by more than 24% from 8.43 million barrels a day (mbd) in 2017 to 10.43 mbd and are projected to hit 11 mbd this year. This again is not a sign of slowing down economy. Furthermore, China’s economy is now a mature economy so it is not expected to continue growing at a range of 9%-12% as was the case in the 1990s and the first decade of the 21st century. Still, an annualized growth of 6.6% for the world’s largest economy based on purchasing power parity (PPP) is an astounding growth when compared with a 2.5%-3.00% for the United States and 2% for the European Union (EU).

    The trade war between the US and China is still causing some uncertainty on the global economy and by extension on the global demand for oil. However, there are indications that that both the US and China are keen on reaching some agreement.

    Still, the Sino-American relationship will increasingly run into trouble from time to time since the great rivalry between the United States and China will shape the 21st century. It is a truth universally acknowledged that a great power will never voluntarily surrender pride of place to a challenger. The United States is the pre-eminent great power. China is now its challenger.

    Therefore, the IMF economists and forecasting economists around the world should consider the Sino-American tension as a constant factor and take it into consideration when forecasting about the global economy.

    The global oil market fundamentals are still robust enough by any standards with the global economy projected to grow this year by 3.5%, global oil demand projected to add 1.45 mbd over 2018 and China’s thirst for oil unabated. These fundamentals could easily support an oil price higher than $80 a barrel this year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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