By Jason Simpkins
Staff Writer
With worries mounting that the global credit crunch will squeeze the worldwide demand for petroleum-based products, oil prices dropped below the $81 a barrel level yesterday (Monday), according to The Associated Press.
Light, sweet crude for November delivery fell 44 cents to $80.78 a barrel in Asian electronic trading on the New York Mercantile Exchange in Singapore. In the United States, Light, sweet crude for November delivery fell $2.20 to settle at $79.02 a barrel on the New York Mercantile Exchange, its lowest close in nearly a month.
In an interview with the Financial Times, Rodrigo Rato, the outgoing managing director of the International Monetary Fund, said it would be "a few months, probably into next year" before there is any return to normalcy from the worldwide credit crunch.
As far as the negative impacts on economic growth, "the U.S. is going to slow down," Rato said. "Growth in Europe looks less strong than before, and in Japan too… Everybody is going to feel some impact."
Rato acknowledged that many large emerging markets are growing rapidly, but said, "to what extent they will keep that momentum will depend on how long the slowdown is in the United States and Europe."
However, while the credit crisis may linger, lower oil prices may not. Summer officially ended two weeks ago and colder weather will soon be here. Also, many U.S. refineries close down in the summer for routine maintenance. When they are brought back online, capacity for winter demand will surge.
Something else to consider is foreign demand, which is rapidly increasing, particularly in China. The state-run Xinhua News Agency reported Sunday that China's net oil imports rose 18% in the first eight months of the year. Between January and August, China imported 757.5 million barrels. Total imports were 773 million barrels, according to the government's customs data.
The International Energy Agency (IEA) said in July it expects China's demand for oil to remain at 7.59 million barrels per day (bpd) for the rest of the year, before rising to 8.05 million barrels per day in 2008 and to 9.96 million barrels per day in 2012. The IEA said China would be the main catalyst for rising oil demand across Asia, accounting for 48.9% of non-Organization for Economic Cooperation and Development demand by 2012.
Xinhua also reported yesterday that China's oil and gas pipelines have increased by 62% in the last four years. According to the National Bureau of Statistics, China's oil-and-gas pipelines stretched 24,136 kilometers at the end of 2006. In 2002 they were approximately 14,964 kilometers. Oil-transmission capacity is reportedly up 59% and gas transmission 158.9%.
Also factoring into a potential rise in oil prices will be the weak U.S. dollar, which has angered the European Union by sinking to the 1.40 mark against the euro. Unfortunately for those overseas, an exchange rate of 1.30 is possible, meaning the pain could increase.
Because oil is priced in U.S. dollars, that price will continue to rise as the dollar loses value.
News and Related Story Links:
- Money Morning Investment Analysis:
China Covets Crude. - Money Morning Investment Analysis:
European Finance Minister to Study U.S. Economic Woes. - The Associated Press:
China's net oil imports up 18 percent. - The Associated Press:
Oil falls over $2 a barrel. - The Associated Press:
Oil Prices Slip Below $81 a Barrel. - The Financial Times:
IMF head warns on impact of credit crisis.