Pumpjacks at work pumping crude oil near Stettler, Alta., June 20, 2007.Larry MacDougal/The Canadian Press
The West Texas Intermediate crude price fell sharply on Wednesday and global manufacturing activity is probably to blame.
The Purchasing Managers' Index for manufacturing activity was released for a wide variety of countries and the results were largely disappointing. In these surveys, a reading of 50 indicates flat activity – no growth versus the previous month.
The Markit U.S. Manufacturing PMI was 50.7, which, while it beat consensus economist estimates of 50.5, remains perilously close to sub-50 contractionary territory. China's PMI came in at 50.1, barely eking out growth in a country responsible for the largest share of global commodity demand. Germany's manufacturers reported decent growth – the PMI was 52.1 – but that was well short of the 52.4 expected. French manufacturers remain well into slowdown territory at 48.4.
While these uninspiring numbers were being reported, Angel Gurria, secretary-general of the Organization for Economic Co-operation and Development, was throwing fuel on the pessimistic fire.
In an interview with Bloomberg, Mr. Gurria outlined a "rather mediocre, a rather dismal outlook." He predicted global gross domestic product growth at about 3 per cent and global trade growth at 2 to 3 per cent in 2016 when "it should be growing at 7 per cent."
Mr. Gurria noted that only five times in the past 50 years has worldwide trade growth been lower than economic growth and this signalled a sharp economic slowdown in each case.
The accompanying chart shows the importance of global growth, and manufacturing growth in particular, for the oil price. The year-over-year change in the oil price has closely tracked the yearly change in the JP Morgan Global Manufacturing PMI. Importantly, the JP Morgan index is calculated monthly, and the weaker data reported on Wednesday is not yet reflected in the index.
There are, of course, numerous factors affecting the oil price. A rising U.S. dollar has provided a hurdle for the commodity-price rally in recent days and the extent of U.S. shale-production shutdowns are both important.
However, the end of the current oil glut – predicted in the third quarter of 2017 – depends on annual global demand growth of just over one million barrels per day. Further weakness in manufacturing activity will delay the balancing of global oil markets and limit the upside for the commodity price.