Chinese economic weakness add to crude woes

Getting More Bearish

If China can’t give the oil market a bounce with a bank reserve requirement cut, then it would appear that oil is just surrendering to the increasingly bearish fundamentals. Greek fears are trumping Chinese stimulus against a backdrop of surging inventories and uncertainty surrounding the backlash of the JP Morgan $2 billion plus loss. 

Greece worries are rising as oil prices are falling and it seems even China can’t stop oil’s epic slide. Greece’s inability to form a government is raising the odds that Greece may leave to Eurozone and the contagion could spread. EU leaders are to meet today in Brussels but it is unclear whether Greece's far left party has any incentive to create a government and refused to go to a meeting to form a coalition government.  Whether Greece leaves the Euro or does not leave the Euro does not change the fact that this election circus will hurt confidence and growth throughout the region.

According to Reuters News, China's central bank will decrease the amount of cash banks must hold as reserves, injecting 400 billion yuan or about $63.5 billion into the economy for lending. Of course that may be because Pimco is predicting that China's growth will hit a multi-year low. According to Bloomberg China’s slowdown may deepen as policy makers unwind the excesses of a record credit boom while gradually stepping up stimulus, leaving 2012 growth at the weakest in 13 years, Pacific Investment Management Co. says. “The economy is unlikely to bottom until the third quarter,” Ramin Toloui, Pimco’s global co-head of emerging markets portfolio management in Singapore, said in e-mailed comments yesterday. “Policy makers will progressively turn the dial toward more stimulus, but not in the aggressive manner of 2009,” restrained by the goal of tempering the credit-fueled property market, he said.

Pimco, which oversees the world’s largest bond fund, sees Chinese growth this year in the “mid-7% range,” a pace unseen since 1999. This call is still lower than that of banks from Citigroup Inc. and JPMorgan Chase & Co. to Bank of America Corp. and UBS AG, which all pared their forecasts after April economic data were released last week.

Add to that safe haven buying in the dollar that will put further downward pressure on price as oil priced in that suddenly popular currency will add to the negative outlook.

OPEC has also been doing its part by producing oil at the highest level since 2008 and continuing to try to talk the market down. OPEC is worried about the surge in U.S. production as well as the slowing economy. A European meltdown will kill demand and help sink OPEC.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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