FT Alphaville " Slumping trade growth - and more oil Jedi mind tricks? Is Saudi Arabia having to again resort to Jedi mind tricks? Does the central bank of oil still have such a big problem with its policy transmission mechanism that it can't weaken prices by production alone - and what effect is this having on world trade? From today's FT: As Javier writes, Saudi Arabia made similar moves back in March in response to concerns about pricing as deadlines for compliance with embargoes on Iranian oil imports approached. So why is the falling demand accompanied by high prices? And even stranger, as Izzy has pointed out, is that the crude oil market shows signs of being over-supplied; and yet is accompanied by backwardation in crude oil futures - a phenomenon historically seen when immediate supplies are short? There are a few possible reasons for this, from the financialisation of commodities markets (oil ETFs and the like) to the hoarding of crude oil supplies by both state and commercial entities. There's also the fact that refining capacity in some key areas in the US is extremely tight - which undermines the ability of additional crude supplies to affect prices, since pumping more becomes much like pushing on a string. But let's just focus on the demand side now. As JBC Energy shows, forecasts for 2012 demands by the three major oil forecasters have been brought lower almost every month this year: As the IEA wrote in its latest monthly Oil Market Report: This modest growth rate reflects the combined effects of sluggish global economic activity, historically elevated oil prices andglobal improvements in energy efficiency. Meanwhile, the agency noted, Brent remains at "a high level by historical standards." Could this be a reason why world trade is slowing faster than world growth? This fact was emphasised by FedEx chief executive Fred Smith in some frank comments after warning about the company's outlook. This is an about-turn from most of the past few decades: Global trade has grown faster than GDP, except for the 2000, 2001 meltdown and 2008 and 2009, for 25 years. And over the last few months, that has not been the case. So that's what's really going on, is that exports and trade have gone down at a faster rate than GDP has. The WSJ's Justin Lahart dug up a dramatic illustration of this: Data gathered by the CPB Netherlands Bureau for Economic Policy Analysis show that global trade volumes grew an unusually low 2.6% in the second quarter compared with a year earlier; the average pace over the past 20 years has been 6.1%. Even if stubbornly higher oil prices are not a big factor in the slowing trade growth generally, it certainly is a factor for FedEx, according to Smith: In a lot of electronic equipment, you have fuel going up, partially in response to the quantitative easing. I mean, as the Fed puts more money out there, people put more money into commodities and drive the price up. So you have products that are getting lower in value per pound, which is the key correlation for goods being moved by air. And so they're going on the water to an improved container liner system that's been developed over the last few years. We'll see if Jeff Rubin has anything to say about it... Related links: Saudi Arabia resorts to Jedi mind tricks - FT Alphaville FedEx Ships Bad News on Trade - WSJ Scarcity amid plenty, oil edition - FT Alphaville This entry was posted by Kate Mackenzie on Wednesday, September 19th, 2012 at 8:56 and is filed under Commodities. Tagged with crude oil, iea, oil, saudi arabia.