We have long held the view that oil prices ought to test and even briefly penetrate the $90/bbl milestone in the third quarter of the year. Continuous OPEC+ cuts, growing confidence in lowering borrowing costs in several developed economies and seasonally strong thirst for refined products have all been part of this bullish jigsaw puzzle. Yet, what we have is a market that lacks conviction to punch meaningfully higher. In fact, it fell hard on Friday together with equities as the global IT glitch wreaked havoc and the US Secretary of State implied that a ceasefire between Isarael and Hamas is within grasp. It is somewhat ironic that the market reaction to this development was a sharp and painful plunge on the day when Houthi rebels continued their attacks on commercial vessels in the Red Sea and also launched a drone strike on Tel Aviv. Joe Biden bowing out of the race for the Whist House over the weekend has not ruffled any feathers either, a somewhat sanguine sign for Democrats – and equity markets.

The culprit for the anxiety on renewed upside prospects is plain to see. Inflation data from the euro zone and the UK suggests that rate cuts are the question of time (the second one this year in the common currency area). Federal Reserve potentates are also buoyant about reining inflation in and lowering of the cost of borrowing in September is a realistic proposition. Thus, the weakening of the greenback seems reasonable (albeit it strengthened a little bit last week). The OPEC+ output constraints, with the usual and built-in lax adherence, will remain in place until October when the gradual unwinding of the voluntary reduction will begin.

Which leaves us with the long-awaited demand boost rooted in the summer driving season on the northern hemisphere. Clearly, refiners have been preparing for it as mirrored in continuous drawdown in US crude oil inventories and the ever-steepening backwardation in both WTI and Brent. M1/M2 WTI spread gained 30 cents/bbl last week and settled at +$1.49/bbl. Its European peer closed at $1.07/bbl, a weekly jump of 14 cents/bbl. Dated Brent for this week is valued $2/bbl over the forward peer. The trouble is that as encouraging as it sounds it has not entailed the proportionate, let alone excessive, strengthening of products. Crack spreads are sluggish, US product inventories keep fattening, so do total commercial stocks. The 3-2-1 CME crack lost $1/bbl last week. It is a clear sign of struggling product demand. What could be the reason for that? Perhaps the most accurate diagnosis was provided by Energy Intelligence. It argues that soaring temperatures are ‘hampering not only the desire but also the ability to go outside and drive’. The key takeaway from last week’s performance, setting aside Friday’s fall, is that unless there are ubiquitous signs of increased consumption of refined fuel the auspicious inflation and interest rate outlook together with OPEC+ production constraints would rather prevent prices from falling out of bed than incentivize meaningful advances. Without ameliorating physical balance challenging $90/bbl will prove an onerous undertaking.

The China Factor

One of the reasons for the sell-off at the beginning last week was the persistent unease about the health of Chinese economy. The country’s National Bureau of Statistics estimated that the economy expanded by a feeble 4.7% in the second quarter of the year, weaker than the forecast growth of 5.1% and well below the 1Q figure of 5.3%. Although industrial production in June came in above expectations, retail sales registered an increase of 2% instead of the predicted 3% rise. Bank lending also proved to be sluggish adding concerns over sluggish aggregate demand. This 8.6% annual rise in exports and the 2.3% decline in imports are also clear indicators of frail economic backdrop. 
The stuttering economy is inevitably reflected in miscellaneous oil data. The country, which is supposedly the beating heart of oil demand growth, demanded, on average, 11.05 mbpd of foreign crude oil in the first half of the year, 2.3% less than the comparable period of 2023. The June figure is 11.3 mbpd, an annual decline of 11%, a grim reading. In the refining sector output plunged 3.7% last month with teapot refiners operating just above 50% of their nameplate capacity whilst 1H run rates declined 0.4% year-on-year. Sinochem closed two of its refineries for an indefinite period because of falling margins. According to the IEA, economic headwinds have led to a 2Q contraction in oil consumption and China now will be responsible for only 40% of the total increase in global oil demand as opposed to 70% in 2023. 
The bleak outlook then is to lead to central stimulus, the optimist would argue, but such move is anything but impending. Last week’s Communist Party meeting offered no guidelines, at least not concrete ones. It advocated ‘high quality development’, a rather vague definition of the way forward. Analysts believe that ambivalent economic policies might only postpone the period of deflation and could lead severely depressed growth and even stagnation. The impact of today’s surprise cut of key policy and lending rates is also equivocal, the Shanghai Composite Index is trading 1% lower. Without structural changes that would help actuate consumers to spend the outlook remains discouraging. Maybe this is the price to be paid when ideology trumps economic pragmatism. 
It is intriguing to observe that notwithstanding adverse economic data and ambiguous prospects the IMF sees a brighter future for China. In its updated World Economic Outlook, the lender of last resort sharply revised upwards its Chinese growth forecast. The country’s economic growth is now estimated to be 5% this year and 4.5% in 2025, an improvement of a hefty 0.4% from the previous projection. On the other hand, the IEA downgraded its Chinese demand forecast for both 2H 2024 and for the whole of 2025. It is projected to stand at 17.25 mbpd for the second half of this year (-130,000 bpd month-on-month) and 17.33 mbpd for next year (-160,000 bpd). Its impact might be dwarfed by global oil demand concerns, but the Chinese economy also indisputably acts as an impediment for a protracted rally. The disheartening outlook has plausibly been discounted in the prices, other factors outlined above will also make dips transitory, but any concrete and believable measure to stimulate the economy will go a long way to enhance the currently gloomy sentiment. 
 

Overnight Pricing

© 2024 PVM Oil Associates Ltd