On Tuesday night the API laid down the foundation of a move higher and the EIA built on it. The latest set of US oil inventory data can be a viewed as a vote of confidence in the resilience of the US economy – there were drawdowns all around with products supplied by refiners, the proxy for demand, also encouraging. There was a combined withdrawal of 5.9 million bbls from commercial stocks with crude thinning 4.6 million bbls, gasoline 1.6 million bbls and distillates 3.3 million bbls. The fact that product inventories declined despite refinery utilization rates increasing suggests healthy demand. Total product supplied is resolutely above 20 mbpd, gasoline consumption was up at 9.2 mbpd last week and distillate is reliably over 3.5 mbpd.

The immediate aftermath of the release of the report saw both crude oil contracts jumping $1/bbl above Tuesday’s settlement levels. And then the preliminary estimate of US non-farm payrolls benchmark revision was published. It showed that 818,000 less jobs were added to the economy in the 12 months to March 2024. Oil produced a sharp U-turn, and the bull party was over.

Apparently, the downgrade has raised the odds of hard landing. So, is the revised job growth report really something to be concerned about? Well, notwithstanding the sell-off in oil, equities climbed, bond yields edged lower, and the dollar weakened. If the perplexing swing in sentiment was unquestionably the product of the job data, which covers the period ending 5 months ago, ie. it is anything but forward-looking, then further weakness is implausible - although admittedly other parts of the equation, such as China, geopolitics, OPEC+ action, Jackson Hole, must also be considered. As the mantra goes the trend is our friend and prices have been on the descent for some times now, as anxiety about Chinese demand has become palpable. So, what is the best course of action? In today’s headline-trading environment chart reading will provide a helping hand in spotting trend reversal. For now, such a change does not seem imminent, yet it might just take a day or two to brighten the mood irreversibly.

One Flew East, One Flew West

Wherever one looks the story appears the same: fragmentation and polarization. There is a bi- or even multipolar world order in the making. In the biggest democracies in the world the rising popularity of right-wing political parties and views clash with moderate opponents. In the US the traditional donkey-elephant animosity reaches new heights with one inward looking and protectionist, the other attempting to advocate globalization within reason.
The economic impact of competing ideologies and approaches is perceptible in the performances of the stock markets of the two juggernauts of the globe, the US and China. After a volatile and even violent summer, major US stock indices sit comfortably above the end-May level and have recovered impressively from the sell-off precipitated by allegedly inauspicious US job reports at the beginning of the month and by the turmoil in the Japanese stock market. On the other hand, the Shanghai Composite Index recorded a negative return of nearly 10% since peaking on May 20. The medium-term picture is equally disheartening for China. Ever since the recovery from the Covid-induced devastation started in March 2020 the Chinese stock market has managed to eke out a gain of 7%, which is dwarfed by the 120% rally the Dow Jones Industrial Average Index recorded in the ensuing 4 ½ years not to mention the astronomical rise of the tech-heavy Nasdaq Composite Index.

There is no question, the two economies have taken separate paths. The US has successfully dealt with and mitigated the inflationary pressure of the last few years whilst China is struggling with deflation. It is imperative to emphasize that both nations are the beating hearts of the global economy and consequently the engine rooms of oil demand. Together they consume more than one-third of the world’s daily oil need although their combined population is only 21% of the total. Consequently, their economic prospects have a salient impact on the global oil balance and tangibly shape investors’ thinking and strategies.

China’s economic misfortunes are one of the major reasons for oil’s recent troubles. Although the country seems to be unable and/or unwilling to re-set the growth trajectory it was on pre-pandemic, its problems go deeper than just the last four years and they are plausibly structural. Last month’s World Economic Outlook Update from the IMF sees the Chinese economy to expand 5.0% this year and 4.5% in 2025. When compared with the average growth rate of 10.4% between 2000, when China joined the World Trade Organization, and 2010 or with 7.3% in the 2011-2019 period (the 2020 GDP growth rate of 2.2% is purposefully omitted), the picture that emerges is ominous.
There is a smorgasbord of reasons for the considerable slowdown in economic expansion. The country’s population is ageing, its workforce is shrinking. The mountainous debt level of the real estate sector creates economic instability. The growing significance of the service sector at the expense of manufacturing also hinders economic prosperity. Rising geopolitical tension, the threat of trade war with former major partners, such as the US and the EU creates additional headwinds. Pragmatic domestic consumers do nothing to re-invigorate spending and neither does the prioritizing of national security over economic welfare.

The combined effect of the above factors is echoed in economic data. The country’s industrial production increased 5.1% in July, the slowest pace in four months. Retail sales beat expectations last month as they advanced by 2.7% but are meaningfully under the historical average of around 12% of the previous decade. Although July import growth of 7.2% outpaced forecasts, exports grew by a disappointing 7%, an unpropitious sign that the reliance on international trade to counter the adverse impacts of weak aggregate domestic demand might backfire.

When the economy struggles, oil demand suffers. We mentioned in Tuesday’s note that China is responsible for 31% of the global oil demand growth in 2024. It is far below the 50% observed before the health crisis broke out. Crude oil import dropped 11% in June year-on-year and was down 2.9% in 1H 2024. State-owned refiners ran at 78.7% of their nameplate capacity two months ago, the lowest in 22 months, and net product exports rose to 2.4 mbpd, S&P Global estimates, insinuating grim domestic consumption. In July, Sinochem shut two refineries ‘indefinitely’ because of poor margins. The difference between the US and China is explicitly on display. Sanguine US economic outlook will play an active role in supporting the global economy and as a result the oil market, too, but the 800-pound gorilla of the Far East is quickly losing economic weight whilst gaining geopolitical clout, which, on balance, does not bode well for oil demand. And if the US support is pulled for whatever reason, any standing oil bull will be obliterated.

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