Analysts say that OPEC’s Effort to Balance Oil Markets this Year could be Derailed by China

Matt Smith, head of commodities research at shipment-tracking firm ClipperData said that OPEC’s effort to balance an oversupplied oil market could have the unintended consequence of crimping crude demand from China.

OPEC’s current strategy would be significantly hurt if there is a falling demand from China, the world’s second largest oil consumer. In a bid to reduce huge stockpiles of oil that have built up during more than two years of weak oil prices, the Organization of the Petroleum Exporting Countries, along with nonmembers, is cutting production.

Bur according to Smith, here could be a less strategic buying from China as the cutting of the oil production has and is expected to boost petroleum prices further and that could result in Chinese demand falling.

“Emerging market demand, and specifically from China, has been really strong in 2016,” he said in a TV interview.

“However, they’ve been on these sort of bouts of bargain hunting and opportunistic purchases to essentially fill their stockpiles, their strategic reserves. And so, as prices rise, and as they’ve risen recently, we’re likely to see less of that bargain hunting next year,” he said.

Ever since he day OPEC — followed by other producers — reached a deal to reduce output, oil prices are up about 20 percent globally. As traders awaited the Jan. 1 start of OPEC’s program to cut oil output, they rose on Tuesday.

Smith said that a high degree of compliance among OPEC members would be the “Goldilocks scenario” that traders are betting on or depending on for the deal to work.

However it would make it harder to reduce crude inventories if Chinese oil demand falls in the face of rising prices.

At a time when producers are trying to offset low prices by attracting more business, China’s huge appetite for oil gives it tremendous power to dictate prices. Market analysts have said in the past that the Asian powerhouse has used its influence to [ay producers against one another in a race to the bottom this year.

Flows of oil to China from OPEC’s three largest producers, Saudi Arabia, Iraq and Iran are reflective of the effect and which can be viewed. As China seeks discounts from a wide range of oil exporters, the shipments have varied considerably from month to month.

(Adapted from CNBC)

Categories: Economy & Finance

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