Now that OPEC is resolute on allowing further descent in oil prices, risking fresh risks of deflation, the last thing the global economy needs is a weakening in China's currency. If China's softening growth means a devaluation of the yuan next year, then the beginning of the end of the commodities super rally would enter a new chapter, ominous for the world economy.
And with the CRB commodities index already posting its 5th straight monthly decline (not seen since 2008-09 crash), the transition from $72 brent and sub $60 could happen sooner than many anticipate.
OPEC maintained current production at 30 million barrels per day sending brent and WTI oil plunging 8% to $71.25 and $67.75 respectively. The Norwegian krone, Canadian dollar and Mexican peso were the biggest losing currencies. Just as Canada's economy was in the midst of delivering an impressive run of better than expected jobs figures, today's OPEC decision poses a key setback to the currency.
US oil independence
The changing oil landscape in the US of the past four years is best captured in the charts below, highlighting the 50% decline in US oil imports from OPEC, and the 132% explosion in US crude production over the same period. The supply-demand equation had no choice but but to weigh on prices, despite the dangerous concentration of geopolitical uncertainties in oil-production nations. The windfall gains on to US consumers and rest of oil-consuming nations will provide a much-needed boost to GDP equation, but the repercussions of falling oil on energy project loans and high yield debt risks becoming the new housing debt of 2015.
Tapering Chinese oil demand
China's imports for oil products in October fell to 2.28 million barrels, which is 50% lower than the high reached in December 2012. Since then, imports for crude oil have gone south, hitting an 11-year low earlier this year. Over the first three quarters of this year, China's total crude imports were up 8.3% year on year to 228.5 million mt, or an average of 6.14 million b/d, according to the data. The year-on-year growth rate outpaces the 5.3% seen over Q1-Q3 last year.
The decline in petroleum products reflects the surge in new refining capacity coming in online, which confirms the global supply curve. China's appetite for crude oil appears to have continued its relentless climb, but a closer look at the last six months suggests a tapering the rate of growth. February, June and October saw a declines of more than 13% over the preceding months. Some say Chinese oil demand is undergoing a structural decline resulting of flower consumption by the country's independent refiners, known as "teapot" refineries, which have started using more crude oil and a bitumen-blend feedstock over the last two years.
Beware of yuan weakness
With much focus placed on central bank policies, OPEC decision and the price of commodities pointing all to the direction of disinflation, China's currency will be the next key element to watch. USD has gained less than 1% against CNY so far this month. But if the yuan declines more than 10%-- brought about by fears of a hard Chinese landing- then to the deflationistas, the beginning of the end of the commodities story may be just starting.