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Actionable news in XIV: VELOCITYSHARES DAILY INVERSE VIX SHORT TERM ETN,

Why oil could rally big in 2016

Despite the astounding surge in the oil supply over the last year, the Bank of England reported that 60 percent of the recent decline in oil prices was due to demand factors.

Cumulative percentage change in the Brent oil price since June 19, 2014, based on 200 commodity price co-Movements
Source: Bank of England November 2015 Inflation Report

The BOE bases this analysis on the co-movement of oil prices with those of other commodities. If oil prices drop simultaneously with other commodity prices, then presumably some common cause is the source. The supply of a range of commodities is unlikely to balloon all at the same time. Therefore, if supply is not the cause, then weak demand is likely to blame.

The BOE cited weaker growth in countries such as China among the reasons for weak demand.

China, directly or indirectly, has been the driver of commodities-demand growth in the last 10 years. Thus, weak global demand implies China's demand must be weak. But here's the problem with that theory: Demand isn't weak. Oil demand year to date is up 6 percent in China, according to China Oil, Gas & Petrochemicals.

And more than that, oil demand globally is posting a stellar year. Over the last quarter, the US Energy Information Administration sees annual global oil demand up 1.3 million barrels per day (mbpd)—a solid performance. Private consultancies put it even higher, with demand up as much as 1.9 million barrels per day. There is no demand weakness as such.

Nor can China's economy be said to be so weak. Official estimates put gross domestic product growth around 6.9 percent for the third quarter, down from 7.7 percent at mid year 2014.

Certainly, this is deceleration, but hardly Armageddon. Of course, unofficial estimates put growth lower, anywhere from 3.5 percent to 5.5 percent. For example, consulting firm Capital...


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