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The Accumulator: time to worry about plummeting oil?

Some argue oil's renewed rout is a sign of a slump in demand that could point to a global recession. Should we be worried?


by Daniel Grote on Aug 07, 2015 at 15:54

The Accumulator: time to worry about plummeting oil?

Investors in oil have endured an unwelcome sense of déjà vu in recent weeks, as the price of crude threatens to revisit the six-year lows it reached at the beginning of this year.

Since the start of June, oil has been plummeting, wiping out nearly all the gains it had made in its rally from January's lows to trade at less than $49 a barrel. That's down from a price of $62 just five weeks ago.

This week, the crude rout gathered strength. As our exclusive Accumulator data table shows, oil lost 9.6% in the week to yesterday.

There are two ways that spectacular loss could be explained. Either oil's producers are pumping out too much of the stuff, or its buyers don't want as much.

The second explanation carries much more worrying implications. A shrinking in demand from China or emerging markets in general could foretell a broader economic slump that some fear could tip the global economy into recession.

But others dismiss this theory. Ralph Solveen and Carsten Fritsch, analysts at Commerzbank, believe the reason for oil's renewed rout lie squarely with supply issues.

First, they argue that while demand is down, it is at least higher than had been expected at the start of the year. They claim that the fear of a slump in demand – rather than a slump itself – has been behind some of the falls. 'In the first few weeks [of the drop] – up to the end of June at least – the price slide was apparently more driven by the fear of a slump in demand from China than an actual notable slump in demand,' they said.

Second, they point to a sharp – and more significant – rise in supply. 'According to the International Energy Agency, oil supply in the second quarter was more than five million barrels a day higher than two years before,' they said.

'The reasons lie in the fracking boom in the USA and the very strong increase in [oil-producer cartel] Opec production in response to this.' Add in a probable jump in supply from Iran after the country signed an historic nuclear agreement, and producers look likely to keep pumping out more oil than consumption can keep up with.

Given the plummeting price of oil, it's no surprise that crude-dependent Russia's stock market was the worst performer of the week, down 4.6% in pound terms.

And set in that context, the FTSE 100's 0.9% gain is all the more creditable given its heavy weighting to oil giants like BP (BP) and Shell (RDSb). The UK blue-chip index gained some respite from oil's falls after the Bank of England raised the prospect of interest rates staying at record lows for longer.

1 comment so far. Why not have your say?


Aug 08, 2015 at 11:37

And some would say the pressure on oil prices are to thwart the efforts of ISIS to sell their own oil supplies at inflated price levels to fund purchases of weapons.

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