A hesitant market became decisively and hastily panic-stricken shortly after the release of the weekly US oil statistics from the EIA. Refiners upped their utilization rates by 2.6% to 94.3% despite sluggish margins leading to a sizable drawdown in crude oil stocks and bulky builds in product inventories, of which the rise of 2 million bbls in gasoline stockpiles was particularly disheartening as it went against forecast and the API data. Commercial oil stocks in the US rose by 12.7 million bbls, almost exclusively due to the increase in the ’other product’ categories, much to the chagrin of OPEC, which is keen to see oil inventories plunge.

Leaked news out of Vienna also stirred up the hornets’ nest. The group is contemplating rolling the 3.66 mbpd constraints into 2025, Reuters reports, either all or some of it, and is rumoured to do the same with the 2 mbpd voluntary reduction, maybe until the end of the current year. It is the latter that was not well received as it could be re-phrased to conclude that some of the unilateral cuts might be withdrawn after June. The price reaction has clearly implied that unless demand meaningfully grows and global oil inventories start plummeting any hint or suggestions of extra barrels will further sour the presently despondent sentiment embodied on the expiring Brent contract flipping under the second month.

And then there are the inflation reports both from the euro zone and the US that can shake confidence further. Global and US equities trended down yesterday as US 1Q GDP growth was degraded to 1.3% from the initial estimate of 1.6%, albeit the increase in jobless claims might have provided some comfort for those expecting moderating inflationary readings. Overnight news of shrinking Chinese manufacturing sector will further dent optimism, or whatever is left of it. As for oil the rhetorical question is as follows: after the euro zone inflation and the US PCE reports are out of the way would you go home for the weekend long or short fully aware that Sunday’s OPEC+ discussion will likely prove much more arduous than expected just a few days ago? 

Cool Heads must Prevail in Taiwan

We in this community find ourselves rather fortunate in the way we are afforded news and the ability to consume in the fashion we see fit. More often-than-not the headlines come, followed by reporting/journalism that is narrowed through the prism of money or indeed the instruments in which events of the day influence. We are spared political slant, social media washing and are the better for it. The largest traded commodity in the world is influenced and influences everything and therefore we are constantly on the lookout for geopolitical bad news which this current Earth does not disappoint in delivering. The merry men of Houthi, who are not exactly a military power, have managed to hamstring shipping in and around the Red Sea to great effect on the pricing of our market. Therefore, one wonders what news we can look forward to, how it is reported, how we digest and what the influence might just be if China decides to take up such a disruptive role in the Taiwan Strait.

The historical differences between China and its, in their view, unruly island-nation brother are well journaled and covered by more learned pens, but the recent election of William Lai as Taiwan’s president has brought about a heightened sense of tension and aggressive reactions from China. The mainland does not much care for Mr Lai or the Democratic Progressive Party (DPP), regarding them both as pro-independence. Behind his inaugural speech that at face value dripped of conciliation and that the current status quo would remain, many now point to language that might just antagonise mainland China. ‘Mainland’ itself, which China likes to be referred as, was supplanted with ‘China’ and the President referred to Taiwan as the ‘Republic of China’, a term that Beijing will not tolerate. He also stood away from referring to the ‘1992 Consensus’ which in short allows for one country and two systems. While this all sound rather subtle, President Lai became more forthright in how Taiwan would not back down in the face of intimidation bringing an immediate response from Beijing that independence was a dead end.

One week later, China embarked on two days of military exercises around Taiwan with the People’s Liberation Army (PLA) stating that it was punishment for Taiwan’s provocation and warned on the dangers of separatism and interference from outside influences. It appears that the new president is not to be cowed. This week saw members of the Foreign Affairs Committee of the US House of Representatives visit Taiwan and Mr Lai was not bashful in lobbying for continued support and assistance from the US in strengthening defensive capabilities. Indeed, defence spending has been elevated by $20 billion and according to the BBC, Taiwan has purchased new battle tanks, upgraded its fleet of F-16 fighter jets and bought new ones, and has built and launched a fleet of new missile ships to patrol the 100-mile Taiwan strait. Whatever hardware Taipei accumulates, it will be as nothing in comparison with China’s. Yet, if escalation evolves, will there be an actual invasion with forces crossing the strait? The Atlantic Council continues to brief that this is highly unlikely and said as much in a 2022 report. With a potential defending force of 450,000 Taiwanese today (2022), using the traditional three-to-one ratio of attackers to defenders taught at war colleges, to undertake an invasion, China would need over 1.2 million soldiers (out of a total active force of over 2 million) that would have to be transported in many thousands of ships. Therefore, escalation will have to find another route and most agree, which is where it becomes interesting for our market, it will be that of a maritime blockade.

If the Houthis can outfox some of the most powerful navies of the world and still cause disruption and damage, a China blockade is all but guaranteed success. Leaving aside the US’s promise to aid Taiwan in the event of war and the horrific prospects of confrontation between the biggest militaries on the planet, the effect on world trade would be seismic. Vessels that endeavour to run a blockade will feel the full might of China’s maritime missile arsenal and it would not take long for ship and cargo owners to order diversions from the geography. Tit-for-tat sanctions and tariffs will abound, economies that rely on the massive trading capability of China will slow and then foreign exchange battles will breakout. Some suggest that the sanctions and tariffs imposed after the Ukraine invasion cost the world up to 10% in GDP, one can only guess what it would cost if this hypothesis ever saw fruition. Oil prices would enter a rollercoaster never before witnessed and there will be tightness and glut all at the same time. We are indeed fortunate in how we receive our news, let us just hope that we are fortunate enough to never read of incidents that incites conflict in the Taiwan Strait or the South China Sea vicinity.

Overnight Pricing

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