The Energy Report: China Wall

Oil and products continue to get hit on the perception that the Chinese economy has hit a brick wall, raising the risk of a global recession. Talk also that players in the Middle East are distancing themselves from Hamas thereby reducing the risk of a regional war. The report said Hezbollah is trying to distance itself from Hamas and Qatar is also. Reuters is reporting that Saudi Arabia will host summits of Arab and Islamic nations in the coming days to discuss the Israeli-Palestinian conflict, Saudi Arabia’s investment minister said on Wednesday. “We will see, this week, in the next few days Saudi Arabia convening an emergency Arab summit in Riyadh,” said Saudi Investment Minister Khalid Al-Falih, at the Bloomberg New Economy Forum in Singapore. “In a few days you will see Saudi Arabia convening an Islamic summit,” he said.

Still, oil products plummeted after China reduced its selling price for gas and diesel even as the OPEC administration tried to assure the market that Chinese oil demand was not that bad. OPEC even vowed to take appropriate measures at the next meeting.  

Chinese data confirmed that last month China’s demand was not bad and imported 11.53 million barrels a day of crude in October. That was up 13.5% on the year and by 3.6% on the month. But that was not enough to convince the trade that is worried about a sharp slowdown in Chinese refining cracks that they think is more than just Chinese holiday and seasonal demand weakness.

The dramatic drop in diesel cracks is raising questions as to whether demand in the US is also faltering. The Energy Information Administration added to those fears by predicting that US petroleum consumption will fall by 300,000 barrels per day (bpd) this year, reversing its previous forecast of a 100,000-bpd increase. Now let’s forget about the fact that the EIA has had to revise all its previous demand forecasts for a moment because when the market is vulnerable, it does not take much for the sellers to pile on.

Yet the US recession talk is becoming real for the moment because not only are we in the weakest demand period of the year, but many are concerned about the impact of rising interest rates and record-breaking consumer debt. The market may or may not listen to what Jerome Powell has to say today. Market talk is suggesting that trucking rates have fallen off a cliff which may be an early sign of a US recession. Still, the drop may be just seasonal, the market is fearing it’s a sign that the economy is going to get worse.

There is also talk about a pullback in shale market investment. That’s a sign that drillers are again pulling back. The question is are they pulling back because they fear a recession or are they pulling back to shore up the books or wait to see what regulations the Biden administration will throw at them next?

The Energy Information Administration is taking the week off to fix their data and computers. Yet the American Petroleum Institute added to the slow fears by reporting a massive 11.9-million-barrel crude oil weekly increase. If confirmed next week by the EIA, it would be the biggest weekly increase since February of 2023. I guess those reported record number of Super Tankers reported by Bloomberg yesterday have not arrived yet to take that crude. Bloomberg reported that, “Forty-eight vessels are bound for the country in the coming three months, according to data gathered Friday by Bloomberg. That’s the most in at least six years.”

Yet despite the crude build, the EIA did report a 400,000 barrel drop in gasoline inventories and distillates, the soft spot of the entire market is showing a drop of 2 million barrels. So, despite the drop in diesel crack spreads the supplies of diesel are still well below the five-year average.

Now it appears that the Biden administration may reimpose sanctions on Venezuela. Diesel traders seemed overjoyed by the fact that the Biden administration was going to lift sanctions on Venezuela in return for free and fair elections. It’s the free and fair election part that is not panning out and now there’s talk that there will be a reversal on the lifting of sanctions. S&P Global is reporting that, “The US could start reimposing oil-focused sanctions on Venezuela if the country does not move toward commitments for free elections and release more political prisoners by 30 November, a US official said today. Venezuela released an initial five political prisoners soon after the agreement, but no more since. And a Venezuelan court on 30 October suspended the results of the political opposition’s primary, which selected former lawmaker Maria Corina Machado as the winner. The government has yet to give assurances that she can run.

High energy prices and short-sighted energy policies are the reasons why Europe is in a mess. John Kemp at Reuters wrote that, “Germany’s energy-intensive manufacturing industries reported another decline in production in September. Output was -17% below the level at the start of 2022 and shows no sign of recovering. Energy-intensive manufacturing cannot be competitive while gas and power prices remain at such high levels.

For trade, the meltdown in prices may not be over but we are getting well below fair value for crude and products. The market is now a money game to see how low it can go. Some point to OPEC production staying strong easing the global oil demand versus supply deficit but a lot of that is seasonal weakness. So unless the economy craters, the market has the chance of a sharp reversal. Use the weakness to get hedged because the risks are still high and the supplies are still historically tight.

Natural gas is feeling the heat of a warm-up. EBW Analytics says that, “natural gas demand shed 38 heating degree days in ten days. Still, technical support at $3.07-3.09 appears stout and shorts may soon take profits—offering chances for near-term relief and easing bearish pressure. Nonetheless, the storage surplus vs. the five-year average may spike to 100 Bcf before the month’s end. Production may continue to probe higher. DTN is currently forecasting a more bearish December weather outlook than November. Any further declines are unlikely to be linear. Still, NYMEX winter risk premiums may prove unwarranted absent severe cold while an oversupplied 2024 injection season only further biases late winter contract risks lower.


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