The F in Finance

Oil Drops as Saudis to Maintain Spending, China Diesel Use Falls

  • Saudi company hasn’t cut investment in oil projects: chairman
  • China’s diesel consumption in December dropped for 4th month

Oil gave up its gains after the world’s biggest crude exporter said it’s keeping up investments in energy projects and diesel consumption in China dropped for a fourth consecutive month, signaling an industrial slowdown.

Futures dropped as much as 4.1 percent in New York. Saudi Arabian Oil Co., also known as Saudi Aramco, hasn’t reduced its investment capacity amid lower crude prices, Chairman Khalid Al-Falih said Monday. Diesel use in China dropped 5.6 percent in December compared with a year earlier and gasoline consumption grew at the slowest pace in more than two years.

Oil resumed its decline after the biggest two-day rally in more than seven years as concerns persist over U.S. stockpiles, production from Saudi Arabia and Russia and Iran’s return to the market following the end of sanctions. Slowing demand in China is adding to oil’s bearish sentiments, according to Danske Bank A/S Senior Analyst Jens Pedersen. Prices may take as long as three years to normalize, according to Bank of Montreal Chief Executive Officer William Downe.

“The China demand figures is a stark reminder that consumption growth may not be stellar in 2016,” Bjarne Schieldrop, Oslo-based chief commodities analyst at SEB AB, said by phone. “Prices needs to stay weak for some time in order to keep excess production out and help rebalance the market later.”

Aramco Investment

West Texas Intermediate for March delivery dropped as much as $1.33 to $30.86 a barrel on the New York Mercantile Exchange and was at $31.21 at 11:34 a.m. London time. Total volume traded was more than double the 100-day average. Front-month prices rose 21 percent over two sessions at the close Friday after the February contract expired Wednesday at $26.55 a barrel, the lowest since 2003.

Brent for March settlement lost as much as $1.46, or 4.5 percent, to $30.72 a barrel on the London-based ICE Futures Europe exchange. The contract gained $2.93, or 10 percent, to $32.18 Friday. Prices advanced 11 percent last week. The European benchmark crude was at a premium of 10 cents to WTI.

Saudi Aramco is spending as much now as it did before the crash in crude prices, signaling no surrender in Saudi Arabia’s battle with rivals. It has formulated a new strategy in response to cheaper crude, Al-Falih said at a conference in Riyadh. The state-run producer can sustain low oil prices for “a long, long time,” he said.

Chinese Industry

“The Saudi news surely would give a little bit of a worry that production would remain strong,” Daniel Ang, an investment analyst at Phillip Futures, said by phone from Singapore. “The main reason for oil losing steam still comes from the fact that oil markets are currently in oversupply.”

OPEC Secretary-General Abdalla El-Badri reiterated he wants oil producers outside the group to assist in reducing the global oversupply. He said at a conference in London on Monday that there are signs supply and demand will start to come back into balance this year, citing a forecast increase in global demand of about 1.3 million barrels a day, and a contraction in non-OPEC supply of about 660,000 a day.

The oil industry will reduce capital expenditure in exploration and production by 15 percent this year, Eni SpA Chief Executive Officer Claudio Descalzi said at the same conference. Oil supply currently exceeds demand by 1.5 million barrels a day and the spending cuts mean there may not be enough energy production in the future, he said.

In China, the world’s biggest energy user, diesel consumption, a barometer of the country’s industrial activity, will stay flat or fall in 2016, while gasoline use will rise by 200,000 barrels a day, according to an International Energy Agency forecast last month.

Markets, including oil and stocks, rallied last week after European Central Bank President Mario Draghi signaled on Jan. 21 that stimulus could be boosted as soon as March. The U.S. Federal Reserve’s meeting will be in focus this week following its first interest rate increase in 11 years.

“The Fed will pave the way for the oil market,” Danske Bank’s Pedersen said. “If it strikes a more concerned tone that will help establish a bottom for oil prices. If it continues to signal several rate hikes this year the slide will continue and we could very well reach new lows.”

This article originally appeared at Bloomberg.


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