Oil prices fell on Friday, in a market disappointed by new Chinese measures to support the economy and lacking a catalyst to revive. The price of a barrel of Brent from the North Sea, for delivery in January, fell 2.33%, to close at $73.87. That of a barrel of American West Texas Intermediate (WTI), due in January, fell by 2.73%, to $70.38.
For Duncan Wrigley, analyst at Pantheon Macroeconomics, the collapse of black gold is due to announcements from the Chinese government, which has promised 10,000 billion yen (around 1,400 billion dollars) to refinance local authorities and allow them to borrow more . “The initial market reaction was disappointment”explained the analyst, emphasizing that most raw materials were in the red. “Investors were hoping for a large-scale recovery plan that includes measures to support consumption”he commented, in a note.
Contango risk
For several weeks, the Chinese government has been increasing its announcements, but so far it has limited itself to lowering interest rates, issuing debt or loosening regulatory constraints on banks to encourage them to lend. “As long as they do not strengthen the purchasing power of the population, they will continue to struggle”warned Matt Smith, analyst at Kpler. According to Commerzbank, Chinese crude oil imports fell 9% year-on-year in October. This is the sixth consecutive month of contraction.
For Matt Smith, oil was also kept under pressure on Friday by the feeling that the short-term geopolitical risk premium is reducing after the US presidential election. “There may be no major decisions on Ukraine and the Middle East by the time Trump takes office”develops the analyst. The market “still trying to understand” what a new presidency of Donald Trump can change for black gold prices, according to Matt Smith. In the meantime, the fundamentals remain “bad”with a plethoric supply and uncertain demand.
The market threatens to fall into a contango position, meaning that short-term prices would be lower than those for distant delivery contracts. This configuration generally reflects a market in which supply is higher than demand in the immediate term, with producers hoping for a rise in prices in the medium term, which may push them to stockpile barrels.
