Risky Business

Oil is being hit with many contradictions but is lower this morning on slowing economic growth fears. Oil, which was having its best start to a new year in eight years, is sinking now because of a weak economic growth reading in China and a downbeat assessment of the global economy by the International Monetary Fund (IMF).

On Monday, China announced that its official economic growth came in at 6.6 percent in 2018, which was below market expectations and the weakest pace of growth in China since 1990. The reading caused Chinese President Xi Jinping to tell his top official to be wary of economic unrest that could be caused by "black swans" and "grey rhinos" but did not mention President Donald Trump or the trade war.

Of course, looking at Chinese oil demand one would not see any real evidence of a slowdown. A report from China’s National Bureau of Statistics showed crude oil refinery throughput in 2018 climbed to a record 12.1 million barrels per day, up 6.8 percent from the previous year. This came after a report that China was promising a 6-year trillion-dollar commodity and goods buying spree from the U.S. to reduce the trade deficit. The purchases would most certainly include U.S. oil and natural gas.

This was supporting the oil market, but the mood shifted as IMF Managing Director Christine Lagarde said that the global economy was growing more slowly than expected and that risks were rising. The IMF again cut its forecast to 3.5 percent this year, from the 3.7 percent expected in October.

Yet this comes against a backdrop where both OPEC and U.S. oil producers are cutting back.  The IEA showed that OPEC cut production by 750,000 bpd in December sending a signal that OPEC, led by Saudi Arabia, will do whatever it takes to support prices. Yet the question is can they do enough if the global economy slows more swiftly or gets hit with “black swans or grey rhinos?”

We think they can. We feel global growth will rebound. China’s stimulus and a more accommodative U.S. FED, as well as a more dovish Draghi will still leave the oil markets short.

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