China’s stock markets have been suffering considerable volatility, sending the central government scrambling in an attempt to pick up the pieces to support the crashing market. Although Chinese economic growth slowed during the past year and local companies’ profits proved unsubstantial, investment in Chinese stocks remained high, creating a bubble that popped on June 12 with the Shanghai index losing a third of its value.
Additional signs of market weakness have spread throughout the Chinese manufacturing industry as sector jobs are cut at a rate unobserved since February 2009. Likewise, the effects of slower-than-anticipated Chinese growth are already being felt by the energy industry, as China remains the world’s largest energy consumer.
China’s weakening economic prospects and stock market plunge have led crude oil futures to fall to uncommonly low levels in early July as evidence of weakening Chinese energy demand growth mounts. Despite significant reductions in CAPEX, many US producers are still reporting high crude output levels as operators develop and produce formerly drilled wells, although recent US Energy Information Administration (EIA) data show declining output collectively in the seven major unconventional basins.
Supply growth is now focused on OPEC, where crude production this past month increased to 31.7 mbbl/d according to the International Energy Agency (IEA). Led by growth in output from Iraq, the UAE, and Saudi Arabia, OPEC is now producing an additional 1.6 mbbl/d compared with January levels, approximately 85% of the current supply overhang. Iraq’s crude exports reached uncommonly high levels in July while a record outpour of UAE crude hit the market. Moreover, Saudi Arabia suggested further increasing production levels to retain market share.
As oversupply in the crude market continues, a sudden reduction in Chinese energy consumption growth may continue to apply downward pressure to crude prices. OPEC, however, seems more bullish, announcing last week that “signs of a more balanced market in 2016 may provide much desired stability to the oil market in the longer term, a prerequisite for the continuity of timely and adequate investments.”