Onshore Energy Conference — London Onshore Energy Conference — London | Page 26

THE GREAT UNWINDING By Paul Hodges Chairman International eChem [email protected] W 26 as two core assumptions from the stimulus period have been over-turned, namely that: • Oil would always trade above $100 a barrel • China’s economy would always grow at double-digit rates It therefore seems highly likely, as chart 1 suggests, that oil is now returning to CRUDE OIL PRICES IN $2016 1861 – 2016 ( TO DATE) 130 120 OPEC crises 110 100 Central Bank liquidity 90 80 70 60 50 Long-term median $23 / bbl ($2016) 40 30 20 10 01 20 11 20 19 91 19 81 19 71 19 61 19 51 19 41 19 31 19 21 19 11 19 01 18 91 18 81 18 71 0 18 61 $/bbl e have reached the second anniversary of The Great Unwinding of policymaker stimulus. Almost inevitably, this now seems likely to be followed by a Great Reckoning, a consequence of the policy mistakes made in response to the 2008 financial crisis. The Great Unwinding began with China’s decision to move away from the stimulus policies adopted by the previous leadership. Since then, those who expected stimulus to return have been disappointed. The leader of the Populist faction in the Politburo, Premier Li Keqiang, has attempted to manoeuvre in this direction several times, most notably with last year’s failed stock market rally. But in the end, strategy has continued to be set by President Xi Jinping and his Princeling faction, who has consistently focused on the need for structural reform with his New Normal economic programme. Oil and commodity markets, along with the value of the US dollar, have been the leading indicators for the paradigm shift set off by the Unwinding. Oil prices have fallen by more than 50 per cent, and the USD Index has risen by around 15 per cent, SOURCE: IeC ANALYSIS, BP DATA