China playing major role in oil selloff

China playing major role in oil selloff

The price of oil continued to fall last week and observers said China, which is embracing renewable energy, was one of major factors in the global selloff.

On Jan 15, oil closed below $30 a barrel in trading in New York and London. Brent crude for March delivery, the global oil benchmark, declined by 3.6 per cent to $29.76 a barrel on London's ICE Futures exchange.

Since the beginning of the year, concerns over China's slowing economic growth havepressured crude prices and equity markets. On Wall Street, the Dow Jones Industrial average dropped another 391 points on Jan 15, and China's Shanghai Composite Index was down again. It has fallen 20 per cent from its recent high on Dec 22, the definition of a so-called bear market.

Based on data from the US Energy Information Administration on global oil consumption in 2013, China ranked second among oil-consuming countries, consuming 10.48 million barrels a day, while the US was ranked No 1 and consumed almost twice as much (18.96 million barrels a day), according to Jian Yang, professor of finance at the University of Colorado in Denver.

"Clearly, the strong demand for the oil from China was a big factor in driving up the oil price, and thus it should not be surprising that economic slowdown in China should also be an important factor in contributing to low crude prices, as it leads to a decrease in China's oil demand," said Yang.

"China's economic slowdown, or reduced oil intensity could reduce global demand and put pressure on oil prices," said FadelGheit, managing director and senior oil and gas analyst at Oppenheimer & Co Inc.

The decrease in China's oil demand is also partly due to the country embracing renewable energy and reducing its use of fossil fuels to help the environment, added Yang.

Also contributing to the price slide is the expected return of supplies from Iran.

When oil prices began tumbling in 2014 China started buying up crude to add to its strategic reserves. "It is quite likely that China will continue the process of stockpiling crude until it reaches the target of increasing China's strategic petroleum reserves to 90 days of supply. According to some estimates, China was probably not even halfway through toward achieving that target at the end of 2015," said Yang.

"To appropriately assess the role of China in the global oil market, it is very important to realise that there are other factors which may have contributed to low oil prices, so that we would not blame China for everything, but only blame it for what we should," said Yang. "The decrease in demand for oil from China, while largely due to its economic slowdown, is also partly a structural change due to its preference for non-fossil fuels. Supply-side factors, which are equally important in driving the global oil market, apparently have much less to do with China."

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