Will Crude Oil Break $100/Barrel?

by: Colin Twiggs August 21, 2008 | about stocks: FXI / IEO / IEZ / IYE / OIH / OIL / USO / XLE    

Colin Twiggs

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The rise in crude oil demand over the last 5 years, as discussed in last week's newsletter, is largely due to growth in demand from China.

So far the Chinese economy has withstood the global slow-down, maintaining GDP growth above 10 percent per year. The Shanghai Composite index, however, has fallen more than 60 percent from its 2007 peak — an indication of what China can expect when the euphoria from the Olympics has faded. Falling crude oil demand from China would threaten long-term support at $100.

click to enlarge images

Shanghai Composite Index

The calculated long term target is $122 - ($145 - $122). Failure of support would test the 2007 low of $50/barrel. This remains less than a 50% probability, however. And hope is not a strategy.

Crude oil monthly chart

Source: Netdania

West Texas Intermediate Crude is edging lower towards medium-term support at $110/barrel. Slowing of the decline indicates support and we are likely to see a retracement to test the new resistance level at $122. Falling demand, however, as the global economy heads for recession, should ensure that the retracement is short-lived.

Crude oil

Source: Netdania

Disclosure: none

 

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This article has 7 comments:

  •  
    Aug 21 07:07 AM
    Millions of cars in China will be back on the roads and factories around Beijing will return to production after the Olympics are over and the restrictions on air-polluting activities are lifted. China demand will go up again. OPEC is talking about cutting production to keep prices higher. Oil will not see sub $100 again. Ever.
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  •  
    Aug 21 07:33 AM
    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.

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  •  
    Aug 21 08:08 AM
    Mangolfer, thank you, thank you, thank you.

    Why can't CNBC also point out the obvious?
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  •  
    Aug 21 10:24 AM
    The article misses the most consistent sources of rising demand - the oil exporters, where prices are often far below world prices.
    With supply broadly static for the last 3 years (extraction has exceeded new discoveries for around 30 years) and rising demand in the exporters that will mean less available for export regardless of China and India.
    Exports from other major areas like Mexico and Venezuela is collapsing already, and ramping up in other areas is by no means taking its place.
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  •  
    Aug 21 02:06 PM
    I agree with most of what 'mangolfer' states... The one point that I have an issue with is that oil inventories are very tight and it doesn't take much of an issue to push prices one way or the other. Couple that with a hyper-kinetic ADHD style market and you have extreme reactions to relatively small changes.

    I'd also like to point out that although this article and the following comments may be true of oil, I think that coal is a different story.

    jegan ;-)
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  •  
    Aug 21 03:50 PM
    Oil prices are behaving normally. Everyone is always looking for conspiracy theories.

    Greatest demand and highest prices are in the heating months and summer driving months: Dec thru Feb and May thru July.

    August and September have generally had low oil prices, since the summer driving season is ebbing and heating demands are very low.
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  •  
    Aug 22 10:45 PM
    There is a difference between demand and ability to pay, or between demand at one price and demand at another. The entire world is affected by high oil prices, developing countries more than the US. China has a huge trade surplus with us, but do they want to send it all to the middle east for oil? Most countries don't have the foreign reserves China and a few others do. They have lower incomes, especially disposable incomes.

    Oil consumption in developing countries will drop more than in the US.
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