Oil continues slide despite record Chinese crude imports

Oil continues slide despite record Chinese crude imports

By Craig Erlam on Jan 14, 2015 08:14:09 GMT

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  • Oil prices tumble again, weighing heavily on the energy sector;
  • More reports of ECB QE supporting European stocks despite plans appearing flawed;
  • Record Chinese crude imports fail to provide any support for oil;
  • UK inflation in focus in quiet day of economic releases.

Another sharp decline in oil prices overnight weighed heavily on US energy stocks, while in Asia a better-than-expected trade balance update from China helped support stocks in the region.

As is often the case currently, oil prices are largely dictating play in the financial markets, with energy companies acting as a major drag on the markets despite the fact that people are generally in agreement that lower oil prices are actually a net positive for the global economy. Of course, energy companies and countries heavily reliant on oil revenues will not be pleased to see the decline but overall, it’s difficult not to see this as a good thing.

With the upside to lower oil prices being overlooked at the moment, I wonder if there’s a strong rally in equity markets just around the corner, once oil prices begin to stabilise. I don’t think this stabilisation is too far away with $40 widely seen as being a very significant barrier for prices. This should come around the time that consumers really start to see the benefit of the last 6 months slide in prices, with one place in Birmingham already selling petrol below £1 a litre, something we haven’t really seen since around October 2007. Once the savings begin to filter through to the public then I expect to see a big upturn in spending in other areas such as retail.

It was interesting to see how little an impact the Chinese trade balance figures had on oil prices overnight, as they continued to tumble despite the world’s second largest economy importing a record amount of crude, above 7 million barrels per day. This clearly shows that while global demand may be weaker that it’s been in the past, the collapse of oil prices really is largely driven by the supply glut and the demand side just isn’t helping matters. Overall the trade figures were encouraging although domestic demand really does remain quite weak, despite efforts being made to boost it, meaning Chinese exports are still hugely important to the country as it attempts to shift towards a more domestically driven economy.

European stocks were very resilient against the slide in oil prices yesterday and ahead of today’s open, it looks like we’re going to see more of the same. Yesterday’s reports that the European Central Bank is drawing up plans for a quantitative easing program based on the contributions of the country to the central bank gave a significant boost to European stocks. As was the case when the US was buying bonds, we tend to see inflated prices in stocks and bonds and this is exactly what investors are preparing for now.

Aside from the additional liquidity that this will throw into the financial system, I don’t really see how this will help the eurozone in any way. Countries like Germany will benefit most from the bond buying program as they make the largest contributions but with yields already below 0.5% on 10 year debt, I don’t see how this will make much of a difference. If we do see this announced by the ECB when it meets next week, unless it’s accompanied by efforts to improve the movement of cash to the areas where its needed most, as well as initiatives to boost demand, I think it’s going to get a lot of criticism. The only positive thing would be that unlikely many of their initiatives in the last 12 months, this should succeed in growing the central banks balance sheet, even if the aid is going to the wrong places.

We have another quiet day in store with regards to economic data, with UK inflation figures the only notable readings this morning. While these are worth keeping a close eye on, expectations for the first Bank of England rate hike have been put back so far now – early 2016 in many people’s opinions – due to the central banks admission that inflation is likely to fall further, that there’s not much to read into today’s numbers. Unless we get a much larger-than-expected decline, that is, which could suggest that the disinflation problem is much greater than the BoE is anticipating.

The FTSE is expected to open 7 points down, the CAC 4 points lower and the DAX 5 points higher.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari UK. He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter, Google+ and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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