There is a strange pall over the investment suites this morning and it comes mainly from Nvidia. The tech darling beat on earnings and revenue for the quarter and issued guidance for the current period that topped estimates. However, being the lynchpin to the ever-bulls in the US bourses, topping estimates is just not quite enough, results need to smash them time and again. So, what looks like an incidental aside in how data centre revenue fell of short of its call, a second-straight repetition, the company’s investment acolytes begin to grumble for the data centres are key in the development of AI. Given Nvidia announced a $60 billion buyback, its dip in share price is a unique reaction to the exceptionalist in the US world of stock market exceptionalism. 

Nvidia then pulls on the S&P and Nasdaq futures which in turn affect their tech cousins across the globe. What also causes a headache for what has been a calmed trade relationship between the US and Japan is, and according to the Japan Times, a trip to Washington by Ryosei Akazawa, Japan's chief tariff negotiator, was abruptly cancelled Thursday just before he was set to depart for a tenth round of tariffs talks with the United States. This comes after an interview yesterday which saw him urging the US to adjust the recently negotiated agreement in which reciprocal tariffs are calculated more favourably to Japan. 

With such a shaky backdrop to the start of the day, the gains made by oil prices due to the 2.4mb Crude and 1.8mb draw in Distillate in the EIA Inventory Report are largely erased in adherence to the wider sentiment. Adding to the inhospitable start is that while not forgetting a soon-to-be hurricane season, this weekend’s US bank holiday marks the end of the driving season and Gasoline has hardly been the panacea hoped for in terms of demand. With deliveries through the Druzhba pipeline to Hungary about to resume after Ukraine drone damage, any short-term reasons to be friendly towards oil prices are diminishing.

Where would oil prices be without China?

Yesterday, the imposition of the extra penal 25% tariff by the US on India due to its refusal to comply with Washington’s demand that it ceases purchases of Russian oil stuffs, is going to be a fascination for those of us in the oil space. The wider market will fret on which part of the myriads of exports will feel the most pressure from the levy because as with all the examples of US tariffs, nothing is straightforward. Pharma, smartphones, car parts, textiles and ironically energy are exempt, therefore, it is difficult to envisage how fifty cents in the dollar tax on clothing, shrimp and jewellery might affect oil prices. Still pressure is pressure and as much as New Delhi wants Washington to mind well enough alone, it has partially turned away from Russia and is looking elsewhere for its crude supply.  

Taking advantage of the trade détente that currently exists between the US and China, Beijing has not been shy in opportunistic buying of Russian crudes. It would be logical to assume that with India reducing its purchases from Russia, any discount it enjoyed would be readily passed to China, for Moscow is in need of a volume customer bearing in mind the state of its economy which is basically a wartime one. There is also an accelerated need for petrodollars, or however Russia receives payment, due to the increasingly successful drone attacks by Ukraine which has seen damage heaped upon Russian refiners now numbering into double-digits. The shutdown of plants has accounted for at least seventeen percent of national processing capacity, or 1.1mbpd, according to Reuters calculations. Accepting then that the Kremlin’s exchequer is becoming lighter due to the pressures of sanctions and the drain caused by conflict, it has little choice other than to increase crude exports. Sources privy to Reuters, report loadings from Primorsk, Novorossiysk and Ust-Luga are expected to reach about 2mbpd, up from an initial plan of 1.8mbpd. Normal seaborne flows and crude grade relationships are not so much opaque but impossible, but at the right price any extra undercover crude will find a welcome on the shores of the biggest importer of all.

Evidence of China’s demand is often seen in the Brent/Dubai spread. While trends in the arbitrage can normally only be judged over a one-month period, there has been a steady erosion of Brent’s M1 futures premium for the last three months and since the first trading day of August from $1.29/barrel over to $0.09/barrel under as of yesterday. Not only is China lifting Russian grades because of favourable pricing terms, it would seem that the recent lower global feedstock prices have prompted a possible bout of strategic petroleum reserve buying. There is no official way to track in and outflows of SPR, but Reuters have developed a unique strategy, and their data suggests oil going to tank. Domestic crude production in July amounted to 4.27mbpd while crude imports totalled some 11.11mbpd. Taking the combined crude availability of 15.38 and taking away 14.85mbpd that was processed in refineries in July, there remains a crude excess of 530kbpd which likely found its way to storage. 

One can only imagine the chagrin felt by Narendra Modi and his government at the full-frontal injustice and inequality of the US allowing China to carry on unhindered in Russian oil trade, but Beijing is making hay while this Russian oil harvest is high. Chinese market sources of Energy Intelligence reveal it has vacuumed 15mb of Urals for October delivery. This equates to 485kbpd which is a staggering amount when compared with the previous eight months seeing an average of 50kbpd. The chat within the oil community is of the arb being open in the East. But that may only endure if China continues in its market-supporting SPR benevolence. The Dubai buying as suggested above is normally a monthly pricing affair and if China’s presence is felt at the beginning of a cycle, it will be seen at the end. With so much crude landing in October oil participants will be watching keenly as to whether the buying seen in July and August in their daily Dubai pricing windows will be able to continue into September and keep oil prices, if not healthy, at least from considering this year’s lows. 

Overnight Pricing