PARIS (ResourceInvestor.com) -- OPEC's latest monthly report underlines bearish trading sentiments surrounding China. In what has been a sudden reversal in the marketplace, China's economic engine is being called into question across the board.
Could a Chinese downturn de-rail the US economy? Or is the volatile oil market situation causing OPEC and analysts alike, to overstate the situation?
Following on from the International Energy Agency (IEA) report last week, OPEC's latest look at the oil markets also questioned Chinese anticipated demand growth. Indeed if anything, OPEC's new pronouncements on China are the most bearish by any organisation so far.
They said that in oil market terms, "apparent demand in China [is] suffering a particularly sizeable downward adjustment. The compelling evidence from the hard data on production and trade points to a less than rosy start to 2005."
"For the period January-May 2005 domestic consumption rose by a mere 2% compared to the same period last year. Initial estimates were pointing to growth rates of around 7-9%," added OPEC.
The cartel also pointed out the great difficulties in knowing exactly what Chinese demand really was. In most un-OPEC-like language
"China will continue to be the biggest headache for anyone who attempts to assess demand for oil in the years to come," they said frankly. "All that we can do is to continue to closely monitor developments and hope to learn from them."
Following downward revisions on Chinese demand growth, and less-than-expected damage from Hurricane's Dennis and Emily, oil prices fell back below $58 on the NYMEX. However some market makers think it may not end here.
Morgan Stanley's chief economist Steve Roach thinks Chinese growth could be bumping along the top of its graph. If it then falters significantly this could curtail future oil demand, cutting prices.
Roach argues it could also trigger deflation in the United States. He says the effects of a bullish commodities sector have supported the US economy.
"Given the distinct likelihood of a China slowdown - a risk that was not evident in 2003 - the odds of a downturn in the commodities [section of the American] consumer price index are actually a good deal higher than was the case during the deflation scare of a couple of years ago," said Roach.
Roach then goes on to say that if the Chinese economy were to falter the situation could be far worse than just the end of any oil price bubble. Deflationary pressures could come to bear on the US economy.
"In the face of a China slowdown, downside risks to the core CPI hint at an outcome that might even go beyond the concept of just a deflation scare. The next time, it may be the real thing," he said.
Yet at the same time other analysts are not so pessimistic. They still see oil in a bullish mode. Is this the outcome of a volatile oil marketplace?
After all, even OPEC agree that "for the second half of 2005 [Chinese] demand is expected to grow by around 10%, in part due to...the possibility that China will commence filling its Strategic Petroleum Reserve."
This aids the case for analysts like Kevin Norrish of Barclays Capital, who are still bullish on price.
"There is still scope for fund buying to add to upward momentum in an oil market," he said. "Tight fundamentals and increasing event risk are already suggesting the potential for fresh all-time price highs."
