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Signs appear to be showing that the global economy is slowing further. From the Euro-zone crisis to a notable deceleration in the developing and emerging economies, the current challenges are manifold. Despite having lost some steam recently, the US economy seems to be more resilient than the other developed economies. However, towards the end of the year, fiscal challenges are expected to re-emerge, as sovereign debt levels remain elevated. Japan is also expected to continue its recovery from last year’s low growth, but its current expansion remains fragile and highly dependent on stimulus and exports. The major weakening factor for the world economy, however, is still the Euro-zone, where many issues ranging from the public debt situation in Greece, to the ailing banking sector in Spain, remain unsolved. The weakness in the OECD economies is having a global impact, particularly on emerging markets. China already experienced a declining trend in exports, which fell from a monthly average expansion in 2011 of 15.1% y-o-y to 4.9% so far in 2012. Contributing to this trend has been the decelerating trade with the European Union, which turned negative in February to only pick-up again in May.
Given their dependence on exports, it remains to be seen how China and, to some extent, India will manage to stimulate their economies locally. China needs to carefully direct any further stimulus to offset its recent deceleration, as too aggressive supportive measures might possibly lead to an overheating in select core asset markets. This would ultimately have unintended, negative global consequences. In contrast, India is facing declining output and rising inflation, which limits its ability to counterbalance this trend via expansionary monetary policies.
Given the renewed attention to macro-economic factors, the uncertainties facing Europe and the slowdown in the emerging economies have led to a shift in market sentiment. This has triggered a strong outflow of financial funds from the paper oil market, amplifying the recent downward trend in prices. Additionally, the current weakness of the Euro-zone has caused the value of the euro to decline significantly against the US dollar. These ongoing challenges to world economic recovery have led to even larger uncertainties for oil demand in the second half of this year. Higher gasoline prices also could impact US demand growth during the driving season. Additionally, the surge in Japan’s oil usage could ease if the government were able to bring back its nuclear power plants into service. Amid these uncertainties for world oil demand, non-OPEC supply is expected to perform well in the coming quarters, despite disruptions in some countries, supported by growth in the US. At the same time, OPEC NGLs and non-conventional oil are projected to see a healthy increase during this period.
Taking these developments into account, the second half of the year could see a further easing in fundamentals, despite seasonally higher demand. Indeed, firm global supply and higher OPEC production have led to a continued build in OECD commercial stocks. Leading the build has been US crude, with inventories now standing at the highest level since 1990. Moreover, high OPEC crude oil production standing above market requirements provides further confirmation that the market remains amply supplied.
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