Energy Economy

Crude Oil Tumbles Following China GDP Report

Whether or not Monday morning’s falling price for crude oil is due to China’s gross domestic product report may be just a matter of interpretation. The Middle Kingdom’s third-quarter GDP growth came in at 6.9%, above the consensus estimate of 6.8% from economists, but below the country’s own estimate of 7%.

China has been buying crude oil to fill its strategic reserve, and there is naturally some concern that the government will slow or even stop the purchases if GDP doesn’t meet targets.

On the NYMEX, benchmark West Texas Intermediate (WTI) crude for December delivery traded down about 1.3% at $46.45, decently above its low of around $39 a barrel in mid-August, but well shy of the $80 or so that WTI was fetching a year ago. The December 2016 futures price stood at $51.61 a barrel Monday morning.

On the ICE, Brent crude for December delivery traded down about 2.46% at $49.25 a barrel, a differential of just $2.80 a barrel to WTI crude. The December 2016 futures price for a barrel of Brent crude is $55.75.

Monday’s downturn in WTI could just as easily be due to the switch to December as the near-month contract, with traders selling futures as prospects for a recovery in demand seem to be further away. When Halliburton reported earnings Monday morning, the company’s CEO declined to project an end to the weak pricing, but did say that when prices begin to rise again, the rise will be sharp.

Oil traders who are not market participants have been reducing exposure to the crude markets. In the week ended October 13, open interest among managed money investors (hedge funds) fell by nearly 30,000 contracts (one contract is equal to 1,000 barrels). A drop of 30 million barrels is not chump change; it represents about 15 VLCCs (very-large crude carriers).

Whether China is responsible for Monday’s downturn in the crude markets is arguable. It could just as easily be due to speculators following the lead of the hedge funders. Whatever the cause, there’s little doubt about the effect.

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