Much of this demand comes from China’s expanding economy, but the People’s Bank of China (PBOC) is working to engineer a "soft landing" to curb rising inflation. Ilczyszyn says that if the PBOC is able to engineer a slowdown, then demand for oil will drop, and regardless of events in the Middle East, if demand isn’t there, then prices should come down.
Conversely, Flynn says China has the potential to add to the demand equation. "One thing that would increase demand but keep prices down a little would be the Chinese allowing their currency to float. Initially that could create a lot more demand in China because with a stronger currency, oil looks cheaper to them, but that could level off and be a bit more bearish," he says.
Although the United States imports the majority of its oil from Canada and Mexico (see "Oil flows"), any discussion of oil supply and demand fundamentals needs to include OPEC. The most recent OPEC meeting saw infighting among members, particularly between Venezuela and Saudi Arabia, that resulted in no agreements over quotas or price targets. "OPEC is going to continue to do what they’re doing and the Saudis will continue to produce at the level they are producing. With prices where they are right now, it’s like a Goldilocks — they’re not too high and they’re not too low," Chirichella says.
Ilczyszyn agrees but adds that because of social expenditures in OPEC countries, oil likely will have a floor around $70. "They have years of budgets based on oil being $70-$80. If there [were] a spike below $70, OPEC probably [wouldn’t] do anything; but if there’s a sustained move below $70, then OPEC could start to pull back on some of their output," he says.
Looking ahead, Ilczyszyn expects WTI to trade in a range of $70-$100 for much of the rest of the year because "The White House wants oil under $100 and OPEC wants it above $70," he says.
With all these issues brewing around the world, central banks in Europe and the Federal Reserve in the United States add to the uncertainty. In Europe, sovereign debt issues still exist, although the most recent actions by the European Central Bank have kicked them down the road. "Bailouts are bullish when looking at the European sovereign debt issues. If Greece is bailed out again, that will be bullish for commodities," Flynn says. "It might be artificial and built on printed money, but it does stimulate demand and create a desire to put money into hard assets."
In the United States, a disheartening August nonfarm payroll showed zero jobs created and added to the speculation that the Fed may move toward a third round of quantitative easing (QE3) or some other measure. One idea, dubbed "Operation Twist," could see the Fed sell short-term Treasuries and buy an equal number of longer-term issues in an attempt to lower long-term interest rates and stimulate borrowing.