Last December, Beijing announced the most sweeping changes to its strict Covid-19 guidelines, including relaxing testing requirements and travel restrictions. As the world’s largest importer of crude, most commodity experts were optimistic that the country's economy would recover quickly and give a healthy boost to oil demand, with some even touting a swift return to $100 oil.
Unfortunately, China’s recovery has been less than impressive, and the initial excitement in the oil markets has been tamped down by a harsher reality. China’s industrial recovery has not been up to par and has fared worse than consumer-facing sectors. The transport sector has also been unimpressive with trucking activity failing to pick up as expected. Jet fuel demand has been disappointing with international flights from China only at 39% of pre-pandemic levels.
Immediately after the Covid rules were relaxed, Chinese refiners went on a crude oil buying spree betting on a quick return to downstream demand. But that has failed to materialize leading to onshore inventories climbing to a two-year high.
The current economic outlook is not good, either. Bloomberg has reported that China’s credit demand weakened in May as the economy’s recovery lost steam. Aggregate financing fell to 1.6 trillion yuan ($224 billion) in May, considerably lower than the median estimate of 1.9 trillion yuan.
Aggregate financing, a broad measure of credit, was 1.6 trillion yuan ($224 billion) in May, the People’s Bank of China said Tuesday, lower than the median estimate of 1.9 trillion yuan. Other economic data points also point to a slowing economy: inflation remained close to zero, exports contracted for the first time in three months, manufacturing activity also contracted and a rebound in home sales slowed. Meanwhile, private investment in the first four months of the year came to a halt despite a rapid expansion in money supply.
Beijing is now considering deploying a broad package of stimulus measures in a bid to boost the economy. Last week, PBOC Governor Yi Gang hinted at more flexibility in monetary policy, including “counter-cyclical adjustments” that will support the economy, with some analysts saying this signals more easing.
Wall Street Growing Bearish On Oil
Whether these measures will work as intended and help boost the sputtering economy remains to be seen. Unfortunately, Wall Street is growing increasingly bearish about the oil price outlook. Last week, Goldman Sachs' oil ultrabull Jeff Currie once again lowered his Brent forecast for December, this time to $86 a barrel from $95 and $100 before that. Currie cited increasing supply from Russia, Iran and Venezuela; growing recession fears and persistent headwinds to higher prices from higher interest rates for his growing bearishness.
Analysts at Citi are also quite bearish, recently saying the Saudi cuts are unlikely to sustain a gain into the high $80s or low $90s thanks to lackluster demand and stronger non-OPEC supply by year-end.
However, the oil markets have received some reprieve after the Fed’s decision to pause interest rate hikes. At 9:50 a.m. EST, WTI was trading up 1.2% at $69.34, for a $1.02 gain on the day while Brent crude was trading up 1.57% at $74.36, for a $1.16 gain on the day. The gains have been rather muted after the Fed signaled another half percentage point increase in interest rates by the end of this year. China’s disappointing economic outlook is also giving the bulls a pause.
Overall, oil markets have become highly volatile in the current week as traders try to make sense of a mix of both bullish and bearish drivers. Oil prices rallied mid-week after the latest EIA report showed crude refining has hit the highest level since August 2019 in anticipation of strong summer demand. However, the same report revealed that U.S. crude production has hit the highest levels since April 2020 while crude exports have declined.
However, crude oil inventories at the WTI pricing hub at Cushing, Oklahoma, rose for the seventh consecutive week and are currently close to the five-year average. The w/w crude oil balance shows unusually large swings in exports and imports. However, the most bearish piece of news came outside the U.S. market with reports that Iran might soon officially resume oil exports with nuclear talks with the U.S. progressing at a faster-than-expected clip.
"Oil prices are caught in a clash between two opposing forces, bearish asset allocators who point to monetary contraction and bullish oil speculators expecting lower inventories in 2H23. The bearish allocators will maintain the upper hand for now, as oil prices struggle to rally until the Fed eases money supply," Bank of America Global Research's Francisco Blanch said in a note.
By Alex Kimani for Oilprice.com
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