If there was any doubt of the longevity of the pessimism that stalks the oil price then that was disproved yesterday as not only did structure suffer, signalling a weakness in physical oil, but flat price, which is more of a barometer measuring wider suite investment, took such a turn for the worse that Brent not only finished $2.79/barrel below the previous close, it has now settled under the all-important and much-watched 200-week moving average. There is little reprieve as we enter the European session from the API data that offers a Crude draw of 2.3 million barrels but is outgunned by another Cushing build of 1.4mb, a Gasoline build of 5.8mb and a Distillate build of 0.3mb.

 The US CPI reading was largely as expected apart from a month-on-month increase of 0.1% which initially caused stock markets to dip sharply, however, whereas bourses staged a recovery this was not emulated by the oil price which fell in sympathy but never looked like mirroring a turnaround after triggering sell-stops under the mentioned 200-week moving average. Whereas stock prices hold onto the idea of an impending pivot by central banks, particularly the US FED, oil’s future hope was dashed by the upward revision by the EIA of 300kbpd for US production in 2024, adding to the increasing feeling of a market that is adequately supplied. 

Furthermore, the FED is all but set to execute a hold on interest rates later today, which as we have mused on recently is a real barrier to long-term buying in oil, being made so much more relevant by a contango market that should attract storage buy strategies. In terms of strategic thinking the market is also going through a process of accepting that China is not the perma-bid it once was and recent markers and events give little signal that the Asian giant will return with its previously insatiable thirst.

 

China, stimulus of any kind please

China’s meeting of the Central Economic Work Conference (CEWC) convened yesterday and whatever may come from the gathering will now be under further scrutiny because of the latest Moody’s Investor Services downgrading for the outlook of China’s credit rating. News agencies point out that in a third of cases a downgrade in outlook eventually leads to a downgrade in actual rating. This has caused consternation among China’s talking heads who as with the case of other countries in similar situations, call the rating agency’s decision unnecessary and based on out-of-date data.

The charge of ‘deflation’ levelled at China is now undoubtedly proven as not only did the Consumer Price Index (CPI) remain in negative territory at the November reading, it accelerated from -0.2% in October to current -0.5% when measured from a year earlier and represents the largest fall since the midst of the pandemic. Furthermore, the Producer Price Index (PPI) fell 3.0% in November, faster than in October’s 2.6% against a year earlier and has fallen consistently for 14-consecutive months. Also known as factory gate inflation, PPI measures prices from a seller’s point of view and the logical conclusion is that continuing lower prices equals continuing lower demand and industrial profits.

Investment from foreign climes is becoming reluctant, according to a Reuters report in November, there was a third-quarter deficit in foreign direct investment (FDI) due in part to souring of international relations with major trading partners such as the United States and Australia. The report goes on to suggest that subsequent ‘de-risking’ by foreign governments has kept overseas corporate and individual investors at bay, but is likely just an added reason as better returns can be found elsewhere and since when do investors of any type willingly adhere to any sort of government lead?

It remains to be seen whether or not these confluences of issues turn out to be serendipitous for just maybe China gets to answer all the naysayers and counter current negative data marker influence in one fell swoop. However, any more assurances of stimulus without offering a flow-charted concrete plan of action to the market will have similar sceptics to those that stalk OPEC+, re-join in another battle against hollow promises.

China puts much credence into its GDP number and markets can expect great fanfare as to what GDP number will be targeted for 2024 by the CEWC. If it turns out to be 5% again, as in 2023, then economists suggest that without a severe bout of stimulus this will turn out to be fluffy aspirations. The job space remains an issue and harking back to when China still published youth unemployment, 1 in every 5 persons between the ages of 16 and 24 were not in employ, this has unlikely changed. The property slump rumbles on as a sightless behemoth crashing everything it touches and even placing CEOs in prison will not stop the negative influence it brings to bear on an almost daily basis.

One of the favourite pastimes of the oil community is China watching, it has to be, the flows to the biggest importer of oils in the world have for years set the tone of demand and price predictions. What transpires at the Central Economic Work Conference, this morning’s news so far would suggest little in terms of short term investment, will turn out to be a large piece of the oil balance puzzle and without stimulus commitment there will continue to be a China-shape hole in the picture of demand.

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