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22 Jan 2016
The decline in crude oil prices: Demand or supply? - Wells Fargo
FXStreet (Córdoba) - According to analysts from Wells Fargo, is not clear what is driving crude oil prices and time will tell if it is by demand-side or supply-side factors.
Key Quotes:
“The nosedive in oil prices that occurred in late 2014/early 2015 largely reflected supply factors. That is, U.S. production was burgeoning in 2014 while Saudi Arabia refused to cut its own production. More recently, the ending of the sanctions on Iran means it will soon start to freely supply its oil on the world’s markets.”
“But prices can also be driven lower by weak demand. The slowdown that is under way in the developing world, especially in China, is leading to deceleration in incremental demand for oil. If the recent drop in the price of oil is being caused by a sharp slowdown in the demand for oil, then global growth could turn out to be significantly slower than many investors currently expect. In that case, share prices should be lower.”
“The problem is that investors cannot distinguish between supply-side and demand-side factors for oil in real time. They see oil prices moving lower, assume that weaker demand is the culprit and sell stocks. Only time will tell whether the current drop in oil prices is being driven more by demand-side or supply-side factors.”
Key Quotes:
“The nosedive in oil prices that occurred in late 2014/early 2015 largely reflected supply factors. That is, U.S. production was burgeoning in 2014 while Saudi Arabia refused to cut its own production. More recently, the ending of the sanctions on Iran means it will soon start to freely supply its oil on the world’s markets.”
“But prices can also be driven lower by weak demand. The slowdown that is under way in the developing world, especially in China, is leading to deceleration in incremental demand for oil. If the recent drop in the price of oil is being caused by a sharp slowdown in the demand for oil, then global growth could turn out to be significantly slower than many investors currently expect. In that case, share prices should be lower.”
“The problem is that investors cannot distinguish between supply-side and demand-side factors for oil in real time. They see oil prices moving lower, assume that weaker demand is the culprit and sell stocks. Only time will tell whether the current drop in oil prices is being driven more by demand-side or supply-side factors.”