Not OPEC, China Dictates The Oil Prices
The OPEC deal will lead to an ongoing tightening of the crude oil market, putting a floor beneath crude prices in the $50s per barrel in the second half of 2017, according to Helima Croft of RBC Capital Markets. She said that prices should ultimately “grind higher into the $60s” by the fourth quarter, with an average price for WTI expected at $61. Political and economic pressure surrounding Saudi Aramco’s IPO and Russian elections – both of which are slated for 2018 – will ensure that OPEC and non-OPEC does “whatever it takes” to keep oil prices stable and on the rise.
But there are a lot of factors outside of OPEC’s control. High up on that list is the role of China, a country that has received little attention in the oil world as of late amid all the furor over the OPEC vs. U.S. shale debate. But China could make or break the oil market this year and next, depending on what happens with its economy. “If you wanted to know where the downside risk is, it is not in OPEC’s decision or in U.S. driving demand or in global inventories rebalancing. I think China is the big source of concern,”Prestige Economics President Jason Schenker told CNBC.
Moody’s Investors Service downgraded China’s credit rating on May 24 to A1 from Aa3, explaining that the Chinese government might try to juice the economy with higher spending levels, which will lead to ballooning debt. The decision from Moody’s is ominous as it is the first credit downgrade for China in nearly three decades. Moody’s expects economic growth to continue to slow in China, putting a heavier burden on government stimulus when debt has already started to become a concern.
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