A worker walks past tanks at a Petrochina storage base in Suining, in southwest China's Sichuan province, in this file photo.The Associated Press
The bullish calls on oil are vanishing after a late August rally that pushed up Brent crude, the global benchmark, by about $10 (U.S.) a barrel – 25 per cent – in a matter of days. Since then, Brent has lost half of that gain, trading on Wednesday at just under $50 while West Texas Intermediate futures were going for $46.
Some forecasts put the oil below $40 or less in the next year, as growth in supply exceeds growth in demand. North Sea oil output, for instance, rose last year and is expected to rise again this year, in spite of the 50-per-cent price fall in the past year.
While the price is bound to be volatile for some time as the bulls and the bears digest a bewildering array of factors, from Iran's probable return to the export market to Indonesia's bid to reactivate its OPEC membership, the market seems to be ignoring a couple of compelling bullish factors.
The first is that Chinese crude oil imports are still rising, in spite of the slowdown in its economic growth rates. The second is that capital spending by U.S. oil companies is excessively high at the current oil price and is bound to fall, inevitably choking off drilling and development.
China's growth slowdown has been reported to the point of tedium. Less reported is that, slowdown or not, the country is still apparently importing every drop of oil it can get its hands on and that's a positive signal for prices. According to a report Tuesday from the Swiss energy-trade consulting firm PetroMatrix, Chinese imports in August were lower than those in June and July, but were still 331,000 barrels a day higher than they were a year earlier.
So far, imports this year are up 600,000 barrels a day over the same period a year ago (imports of refined products are lower because China is launching a fleet of new refineries).
China may simply be taking advantage of the low price to fill its strategic oil-storage tanks, suggesting that once they are topped up, imports will decline. But no one outside of China knows the tanks' capacity, or even whether the rising imports have anything to do with the strategic reserves. In the meantime, there is little sign that oil imports will plummet as Chinese growth wanes. China is still growing at a clip that is the envy of Europe and North America.
In the United States, the shale oil industry faces a slowdown not because of waning demand, but because the industry's capital spending greatly exceeds its cash flow, an unsustainable development as financing tightens up. According to a report Monday in the Financial Times, the capital spending of independent oil and gas companies listed on the stock exchange exceed cash from operation by $32-billion in the six months to June. For all of 2014, the deficit was $37.7-billion.
Bankers are getting nervous as oil prices remain low; so are bond buyers. As they become less willing to lend to the shale-oil companies, capital spending will have to come down and when it does, production will fall. It's already falling, according to the U.S. Energy Information Agency. At last count, the number of rigs drilling for oil in the United States is down 59 per since last October. Shale wells are short-term wonders. Raising or sustaining production requires a lot of drilling. When the financing slows, the drilling slows with it.
The rising Chinese imports and the financial woes of the U.S. shale industry do not mean that oil prices are set to rise. Those two factors, however, do suggest that prices are not set for outright collapse from current levels, even if they could take another dip. Over all, they are two significant bullish factors in a sea of bearish factors.
If China keeps oil imports intact, and U.S. shale oil production keeps declining, the market just might see another price pop.
Eric Reguly