U.S. crude oil prices dropped by seven percent at the week's start. The price slump was fueled by China's weak economic data, warmer U.S. weather and the increasing doubts that both OPEC and non-OPEC oil producers would join together to reduce the excess supply worldwide.
The manufacturing industry in China, the world's biggest energy consumer, further weakened in January, as what could be the fastest pace since 2012. According to Frost & Sullivan's business development director, Carl Larry, China is the remaining oil consumer outside the U.S. and that everyone is depending on them.
"As long as we keep in this scenario where China is the only real consumer to pick up the pace, we're going to see moves lower every time China has an issue with their economy," says Larry.
The forecasts of warmer U.S. temperatures through the middle of February also hurt the demands for oil. Moreover, dreary consumer spending data and weak manufacturing dropped U.S. stock prices, putting more pressure on oil prices.
Last week, international benchmark Brent crude price increased more than 30 percent from a disappointing 12-year low. The surge happened after energy officials from Russia announced they received proposals on output management from OPEC lead Saudi Arabia.
Investors are wondering if an oil rebound could be underway. Based on the Intercontinental Exchange data, the surge in Brent's net long positions last week was the highest in four years.
However, analysts at Goldman Sachs find it "highly unlikely" that Russia and OPEC producers would collaborate in cutting oil output. Moreover, Iran is less likely to participate in cuts, since it has a plan to increase its exports after years of penalty. OPEC-member Iraq also reported increasing exports in January.
"Global economic growth is slowing and we aren't seeing any action to reduce supply. OPEC and other producers aren't negotiating, they're just setting terms," says Confluence Investment Management's Chief Market Strategist Bill O'Grady.
Lastly, Goldman Sachs anticipates crude oil to trade somewhere between $20 and $40 per barrel up to the second half of 2016. The rate is low enough to pull production down in line with its demand.
Photo: Steven Straiton | Flickr
