Fossil Fuels Struggle with Low Demand – 1/13/16

Oil is only one of the fossil fuels in a prolonged price slump. The slowdown of China’s economy has taken a heavy toll on coal as imports to country have plunged in the face of domestic oversupply and attempts to reduce dangerous levels of air pollution. As the Chinese government pushes companies to get their electricity from renewable energy sources, coal imports will take continue falling even as the government suspends the approval of new domestic mines and China stockpiles other raw materials also seeing price collapses.

China continues to be a source of disappointment for those expecting it to provide the much needed increase in oil demand. The government recently announced that it would not be adjusting local diesel and gasoline prices to reflect crude oil prices at less than $40 a barrel. Given the difficulty Chinese energy companies would have operating at lower prices and the fears of increased pollution, the move makes sense domestically even if it effectively caps demand in one of the major consumer nations. In addition, Chinese refineries – both state-owned and teapot – are facing the same overcapacity problems as the rest of the economy as they continue pumping to the point that China has become a net exporter of oil products. The net result of China’s soaking up crude only to push out refined products only exacerbates the weak demand issue as regional markets face bulging stockpiles. Such imports of crude¬†create¬†the illusion of demand where there is only overcapacity and export quota.

In the Middle East, sanctions against Iran are expected to be lifted this week with the country adding half a million barrels a day of exports within the following week. If the market has not already adjusted the price of oil in expectation, then the price is likely to be beaten down again. With gasoline demand declining in the US as Winter encourages people to stay at home, the additional barrels will only be adding problems to an already vastly oversupplied market.

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