Timing is the very essence of success, be it from a comedian or a sportsman hitting a ball. The Saudi Arabia and Russia concerted announcement was no accident in when it was announced. Mindful of the US long weekend and the absence of risk takers at the screen-face, the press release was aimed for maximum impact into the meat of trading hours and added a spicy ingredient. The oil fraternity had become a little humdrum in its expectation of a voluntary 1-million barrel per day cut by Saudi and there were even mutterings that Russia’s probable 300,000 barrel per day cut was at best, adequate. It is possible that this joint manoeuvre had the very real prospect of the start of an overhang in crude that might appear as refiners go into turnaround. However, the added spice turned out to be that these extensions would last for the balance of the year and the market reacted, with success for Saudi and Russia, accordingly. WTI and Brent rallied to the tune of $2/barrel, making new highs and punching into the high ground of prices last seen in November 2022. 

A Rystad analysis on Reuters observes that there is now likely to be a 2.7 million barrel per day deficit, which concurs with the Goldman Sachs note of yesterday. However, and the reason the market gave back half of the gains and is listless this morning, is because within the language of the joint announcement there is a caveat that these cuts will be reviewed on a monthly basis. This flexibility add-in allows for wiggle room, but the market smells a taper. Whether or not this is designed to appease the undoubted protestations that will come from the US and other nations fighting an inflation war or allows a rethink if oil gets too near $100/barrel or even, and a worthy muse, that Saudi’s national coffers will start to experience some serious pain with a continued fall in petro-dollars, remains to be seen.

An interesting development this morning, relevant to Russian oil flows and brought to light by Reuters quoting ‘those with knowledge’, is that the G7 and allies have shelved regular reviews of the Russian oil price cap scheme. If this turns out to be fact, then cynically speaking the world is again about to turn a blind eye to whatever tools are used to rename and reroute oil around sanction in the name of convenience against higher pricing.

Within today’s trading data, service PMIs from the United States will be keenly looked to as will European retail sales and the Bank of Canada’s interest rate decision. All are snapshots of demand and inflation signals which attention to can only be exaggerated by the joint efforts of Saudi and Russia.
 

GMT +1	Country	Today’s Data	Expectation
10.00	EUR	Retail Sales YoY (July)	-1.2%
14.45	US	S&P Global Services PMI Final (August)	51
15.00	CA	BoC Interest Rate Decision	5%
15.00	US	ISM Services PMI (August)	52.5

 

China’s oil strategy is working

The granting of the latest export quotas to China’s refinery sector allows for some conjecture as to the intentions of the world’s largest importer of crude oil and its biggest refiner. The amount of volume in quota for refined fuel export has dramatically increased when measured against the same period of last year. Licensing will now allow oil product outflow into international markets to reach 53.99 million tons, markedly higher than the Reuters published previous year of 34.75 million tons. In July the National Bureau of Statistics data showed refinery utilisation rose by 17% and according to Reuters tracking of the runs, was the third highest on record. At the same time as this increase, finished fuel exports rose by over 50%. 

Little doubt then that China plans to continue in taking advantage of the rich margins available in products during and beyond the run up to global refinery turnarounds. Indeed, with much of China’s industry struggling to find not only domestic demand but also international, refinery profits from exports might just be an area where China holds advantage. This refers to the very large inventory of feedstock that has been built and although estimates vary, most agree that it is well above 1-billion barrels. China has consistently, and probably to the chagrin of those intent on hamstringing Russia with sanctions, been the largest customer for Russian crude grades. It is likely that it has also sucked in millions of barrels of discounted crude from the other sanctioned nations, namely Venezuela and Iran. So many of these deals remains dark; the size, the price, the discount, they are beyond tracking other than estimates. However, would it be beyond imagination that this consistent purchasing in a rising market has left China with an incredible average in the price of its current crude storage? Continuing with this speculation, and it is just that, if China holds oil at say $70/barrel crude and is rolling out product into a $30 margin for arguments sake, then one would have to say that the Asia powerhouse has negotiated market circumstances even better than Saudi Arabia. 

This current ‘positioning’ allows full optionality. As reported recently, China has ceased to be an aggressive buyer of crude at market and is drawing down on its plentiful reserve. Selling into the product bids during the refiner seasonal hiatus and at the same time, buying into a possible crude dip that would be associated with the normal pattern of things, thereby replenishing any crude draw down is one option. If the market maintains this rally due to the 3-month extension of Saudi Arabia’s voluntary cut, China need not participate in buying at higher numbers for quite some time and if prices deteriorate as predicted in 2024, China has another option in the shape of time. Even if a sustained rally into triple digit crude forces China to come to the crude markets, such buying would mathematically ‘average in’ its current length thus maintaining a fluid cushion from which its refiners can carry on claiming healthy product margins.  

What will prove troublesome for the market on how such margin trading will develop is if the threat of a more closed-door policy on information sharing is made good. Last month and fresh from announcing that there would no longer be a publication of youth unemployment statistics, which have obviously been alarmingly poor, there now appears to be similar sensitivity to energy information. Admittedly, this does appear initially to be aimed at ‘green energy’ technology and framed within the eternal techno-war, of both words and trade actions, between China and the United States, but ambiguity of the language does not prohibit the notion that such an information suppressant might be expanded to fossil fuel data and their like. This speculative look into the ‘what ifs’ of the China refining sector may well be the future of assessing the many parts of China’s oil industry if data sharing is deemed disadvantageous to the national interest.  

Overnight Pricing