Market Meltdown Means More Pain for Oil Producers
Supply-side downward price pressure has been the story of global energy prices over the past year: newfound supply from the Shale Revolution, OPEC’s gambit of market-share grabbing inundation, and new supply coming online from Iraq and soon Iran. The result was a plunge in oil prices from $115 in mid-June 2014 to below $70 by mid-December, and then to the low $40s as of last week.
Now we are seeing signs of a new economic crisis, one that began in Asia and spread to Europe and North America. China’s stock market meltdown has gathered pace and the recent yuan devaluation stands as a grim omen of not only tepid Chinese growth, but a lack of currency stability in the region should the crisis deepen. The 8% drop in Chinese exports in July is leading to a few uncomfortable questions of oversupply and a lack of global demand – systemic issues that transcend the sphere of domestic economic policy in China – and a looming currency war will only serve to make things worse.
The precise bottom of this newest sell-off in global equity markets is open to speculation, but in terms of oil prices it represents demand-side downward pressure and, depending on how things pan out, the potential for a whole lot more of it. WTI crude was down over 3% in pre-market trading to flirt with the sub-$39 range.
This is a scenario that is various degrees of terrifying for oil-producing economies, many of which have weathered the past eight months with a combination of fiscal austerity, asset sales, debt issuance, and burning through foreign reserves – basically holding on for dear life and hoping for a price rebound which now looks to have been pushed further into the future.
