China stops Oil Price rally

Posted by Oilism.com on January 11th, 2010 at 10:06am

A couple weeks in a row the price of a barrel crude oil rose but last Thursday China made an end to the oil price party. For now at least, due an economic recovery in the offing, analysts expect that the  demand for oil will further increase in the coming months rather than decrease.The Chinese central bank Thursday shook oil investors in oil and woke them up from their dream of ever rising oil prices. The continuing cold weather in Europe and parts of the United States was the main reason of the quick oil price rally in the last couple of weeks. The price of a barrel crude oil rose more than $11 in ten days, leading to a price of around $ 83, the highest in fifteen months.As surprise for many among us the monetary authorities in China broke with the easy and broad policy of lending money to banks. A monetary tightening policy could lead to a lower growth of the Chinese economy and thus a decrease in demand for oil on the long term. These descisions of China, the second largest consumer of oil, had a direct effect on the oil price last week. In New York was the price of a barrel of oil during the first hours trading almost a U.S. dollar per barrel down. Later this drop weakened down to $ 0.45 to $ 83.73. In London the price of oil was also $0.45 back to $81,44.

Fuel for the Economy

In recent years, the Chinese banking system of provided the economy with enough liquidity to fight the economic crisis. Banks were ordered to provide much financial credits to the economic engine to provide sufficient fuel to face the problems of an economic downturn. It succeeded because the growth in Chinese gross domestic product (GDP) has remained a normal level during this period.The central bank, the People’s Bank of China, is clearly done with this broad policy for the banks and so adjusted the policy overnight. Analysts expect the monetary authorities to skim the liquidity of commercial banks by 137 billion yuan ($ 20 billion this week. This is the largest decrease in eleven weeks. ”Lending to the industrial sector is less interesting,” as said by analyst from Barclays Capital. An official interest rate increase is not expected before the second half of this year.

U.S. Dollar

China was not the only factor that lowered oil prices last week. The second factor was the U.S. dollar, which continued its march to an increase of 0.7% against the euro. A stronger dollar makes investing in commodities relatively less attractive.The cause of the dollar increase was due better than expected U.S. economic figures. The number of applications for unemployment benefits rose in the week to January 2nd 1000, while analysts had expected an increase of 7000. Today, new figures on employment in the United States gives a detailed picture of the economic recovery in the world’s largest economy.

Breather

The slight decline in oil prices, is according to some analysts no more than a respite on the way to further increase of the oil price in 2010. ”It is nothing compared to the increases of the past weeks,” said one analyst at the Bloomberg news agency. ”For a couple of days the price can further decrease in performance, but it is only temporarily for the optimists.”

Oil Critics

A rising group of oil critics and traders become convinced that the recent 20% price increase is not justified, given the slowly demand development for oil and oil products in the United States.Oil prices rose sharply from mid December from a level of $ 69 per barrel. The U.S. Energy Information Administration, a part of the Energy Department, stated last week that oil stocks could go down further.According to oil traders Ritterbusch and Associates is an oil price above the level of $ 83 per barrel at this moment indeed a new oil bubble. A sharp fall in oil prices is not excluded, such as when the winter weather in the northern hemisphere begins to depart. A structural demand increase is not seen at this moment.However, due to the cold winter stocks of heating oil will decrease rapidly. Barclays Capital thinks that this could support the oil prices if the winter continues much longer.

Under China Oil