One must admire the optimism of investors. The Sino/US trade talks enter a second day and instead of being seen as them being a touch sticky, markets across the gamut of investment are starting to price a successful outcome. Yes, hope is whipped by the US Administration with the likes of the Commerce Secretary, Howard Lutnick, observing initial discussions had been “fruitful” which was endorsed by his President back in Washington claiming, “we are doing well with China.” But the mind does boggle because the starting point of negotiations are from self-inflected US tariff problems, but here we are, and market participants can only trade what is in front of them. Apart from conciliatory language going into the London talks from China, there appears to have been no propaganda press drops as witnessed from the Americans. This might come from confidence for it has become apparent the motivation for the US to engage is China’s almost monopoly on the production of rare-earth materials, controlling 90% of global processing. In opinion seen on CNN, while China may step up the pace of license approvals to cool the diplomatic temperature, global access to Chinese rare earth minerals will likely remain more restricted than it was before April, according to Leah Fahy, a China economist together with a London-based consultancy. All bodies of investment have rightly adopted special forces attitudes in dealing with the immediate thing in front of them, and until the London pow-wow is out of the way, everything else is slated for later attention.

Trade agreements cannot gloss over market realities

It is difficult to make sense of how any sort of unlikely breakthrough in Sino/US relations will give increased demand within oil circles. Putting pen to paper in absolute terms as to what the level of tariff will actually be after the London talks and supposed 90-day pause is over, is predictive suicide. Yet, as it stands at present the current tariff on Chinese goods into the US is 10%, or so the banners of headline say, but this foregoes the reciprocal 30%. However, according to the Peterson Institute for International Economics (PIIE), as of now, the US average tariff on Chinese goods stands at 51.1 percent, covering all imports. The veil of complexity is brought about by how many tariffs overlap as some have been brought in to address unfair practices, and some under the cover of national security. China’s tariffs on US imports are only slightly easier to fathom, and staying with the PIIE take on world trade, are estimated to be 32.6%. How then the build-up in recent historical acrimony sees a ‘reset’, and a global desired flat rate ensues can only entail a public climbdown that is intolerable for both Presidents Trump and Xi.

Even if by some diplomatic miracle a state of utopian free trade suddenly breaks out, it is questionable whether the current environment of China’s economy and the inability for US crude to find export homes can quickly be turned around. Once again, the release on Monday of China’s inflation data will not have the People’s Bank of China worrying about reaching for an interest rate rise. Activity is so stymied that factory gate inflation or PPI registered its steepest fall for 22 months. There can be little doubt on the influence of tariffs to sentiment, but China’s general economic activity has been a trove of disappointment and even with continued talk, and implementation of PBoC intervention and governmental stimulus, the fragility of domestic demand has become very reliable when undertaking a negative swipe in commentary to oil demand. Turning to the National Bureau of Statistics CPI release, the May year-on-year measure of -0.1% is the fourth consecutive month of deceleration. Retail sales have been slower; consumer confidence shows no sign of sustained improvement and weak internal personal demand persists. The reduction of crude imports in May, down 3% from the previous month and 0.78% year-on-year, is subject to a reduction in refinery runs due to maintenance. However, inflows for the first 5-month period of the year are higher by 7.5% although there is a common assumption shared that this is very much to do with discounted barrels from Russia and Iran and indeed a stock piling regime undertaken by Beijing. China does not reveal the state of its SPR, but last month Vortexa said inventories were increasing at the rate of 1.1mbpd.

The new OPEC mission to make production great again is starting to hurt US crude exports. Given the preference in global refining to run slightly heavier crudes because of their production yields and how some processors have been built with medium crudes such as Dubai in mind, appetites for the lighter US varieties are on the wane. There are also issues for refineries when running lighter crudes in hot weather, but it really is about optimum utilization and modern plants in India and China were designed to give best margins when fed with medium/heavy crude. Given the new increasing availability of OPEC crudes, WTI/Midland might just start slopping around the Atlantic along with Nigerian and other North Sea grades. With the readiness of Kazakhstan to deliver CPC blend as and when somebody wants its, and lighter grades being offered from South America to North Africa refiners are in the enviable position of boasting a buyer’s market. Therefore, whatever fudge the negotiation between the trade representatives of China and the US eventually cobble together, any trade pact that makes moving oil easier does not counter that there is less demand and probably more crude oil to come for the balance of the year.

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