Navigating The Oil Market In 2016

The oil price collapse was one of the biggest stories of 2015. It caused ripples and shocks throughout the global financial system, as energy exporting nations, shareholders and oil and gas companies all felt the brunt of the deepening bear market. If the first trading week of the year is any indication, 2016 may be a very long year for the global financial markets in general and oil in particular.

China Growth Woes

The year 2016 started off with a bang, with Chinese equities posting their biggest selloff since the August financial crisis. China’s Shanghai Composite Index plunged a staggering 6.9% in the first trading session of 2016; the CSI 300 Index of the largest 300 companies listed in Shanghai and Shenzhen also dived 7%. The rout quickly spread west to Europe, where the pan-European STOXX 600 Index fell 2.5%. Meanwhile, Wall Street’s Dow Jones Industrial Average plunged 276 points on the first Monday after New Year’s Day, marking its worst start to the year since 2008. When the dust settled, the Dow had fallen a staggering 1,079 points in its first week of 2016, marking the worst ever start to the year for the blue-chip index.

The news that sparked the massive global equities rout was the Caixin China manufacturing PMI, a monthly report surveying the current state of the Chinese manufacturing sector. The report showed that China’s manufacturing output contracted for a tenth consecutive month in December, raising fresh warning signs about the world’s second-largest economy.

For oil traders, a deeper economic slowdown in China likely means lower prices for crude and natural gas. China, which is the world’s largest energy consumer, has been mired in a protracted economic slowdown for more than two years, as Beijing implements painful economic reforms intended to make the economy more consumption-oriented rather than export-driven. Weaker oil demand from China has been a principal factor behind the 18-month oil price collapse. Chinese growth is expected to weaken for the next three years, making any rally in oil prices limited at best.