We live in strange times and experience strange moves from markets. Yesterday the US Inventory report from the EIA were highlighted by builds. They registered in million barrels; Crude +1.371 versus a -0.239 call, Gasoline +0.156 versus a -0.897 call, Cushing +0.213 versus previous -0.758, Refinery utilisation was -0.5% versus a +0.4% call, Crude production was steady at 13.2 with the only significant draw in Distillate of -1.686 which was almost exactly on call. Admittedly, and in isolation, the data is rather benign but they were so glaringly worse than the APIs one might have been forgiven in thinking that being relatively negative in comparison, they should have added more selling pressure to a market that was in trouble for most of the session.

What put paid to any more bearish momentum was an article from the Wall Street Journal concerning missiles from the United States heading for Israel. Such is the twitchiness of oil’s trading environment that it prompted the investment tourists to come in with bull guns blazing, returning Brent flat price futures in particular from whence it had come. No matter that they were Patriot missiles intended to protect US troops in the area and that Israel had agreed to delay any invasion of Gaza until they (the missiles) had arrived, half a headline seems to be enough. Returning to strange, is the decision by the Israel Defence Force (IDF) to conduct a raid into Northern Gaza overnight in apparent opposition to the understanding with the US, and even though forces have since withdrawn, counterintuitively the oil price has retreated at time of press.

There are other factors that dog the investment world this morning. Tech-stocks have taken a turn for the worse after META, the Facebook owner, published a poor forecast for future trading and the subsequent fall in its share price has prompted the Nasdaq to take a dive. This comes at time when yields rally again as fears continue surrounding the ‘higher for longer’ interest rate attitude, which will see likely substance from the European Central Bank’s decision today and the expectation of a hold in interest rates at 4.5%. The US Jobless Claims are always sought as market indicators, but they might just a have a little more resonance today as we approach next week’s FOMC rate decision. A strong showing, as in fewer claims, will see investor flight again into the US Dollar which today has already benefitted from yields, with the Dollar Index (DXY) approaching the 107 high seen earlier this month. One last thing to consider is the December Brent Options expiry today, it would be very convenient all round for a futures price to be near a round number such as $90 at settlement, therefore movement away from here might be a little more policed than usual.
 

Capacity cap is not all about going green

Chinese refiners processed 675.9 million tonnes of crude oil last year, data from the National Bureau of Statistics (NBS) showed in January. In June, and as published in China Daily, data released by the Economics and Technology Research Institute of China National Petroleum Corp showed China topped the ranking in oil refining capacity in 2022, at 924 million metric tons outstripping the United States for the first time. This data source mixing serves only to highlight the importance that this section of the oil space is to China, the growth and strength of the oil processing industry is not only a cause for national pride, but it also remains, at present, one of the few successes in heavy industry.

CNPC accompanied by the private Zhejiang Rongsheng and Jiangsu Shenghong companies in recent history undertook a vast expansion of refining capacity to take advantage, in the main, of a gap they had spotted in the petrochemical/plastics market, but because of the rest of the world’s inability to process and service summer demand for gasoline and from distillate products in all of their guises, fuel income has proved a welcome bonus. Total refinery throughput was a record 64.69 million metric tons in August, data from the National Bureau of Statistics (NBS) showed, up 19.6% from a year ago, the fastest annual growth since March 2021 (Reuters), with January-to-August throughput gaining 11.9% from a year earlier to 491.4 million tons.

With such a compelling and probable lucrative backdrop, it appears strange timing for yesterday’s announcement from China that it was to set a 1-billion metric ton cap on capacity for refiners from 2025. The concept of a limit is not a new idea, it traces back to October 2021 and was part of plan from government that would see peak carbon emissions by 2030. However, it has taken the ensuing 2-years for Beijing to flesh out the proposal and this then is the result. The lead authority will be the National Development and Reform Commission (NDRC) with its major remit including limiting of new capacity, upgrading/optimising of existing units and the shelving of small and older plants, targeting those that have a capacity of less than 40,000 barrels per day.

Apart from an emissions peak target of 2030, in September 2020 President Xi pledged to achieve a state of carbon neutrality by 2060 joining in with the other governments setting of zero emission targets, while being very aware that in 2020 China was responsible for one-third of global CO2 pollution (IEA). This tidying up of its own refinery back garden is hardly the stuff of altruism. Indeed, if one compares how much crude is actually being run and the size of the new capacity cap, China is offering itself a little wiggle room if a green conversion aim is delayed. All nations are aware of their energy security, but China’s reliance on imported coal and oil is a forever bane, and it is not difficult to speculate that it is none too happy with Saudi’s manhandling of supply and price even though it enjoys discounted imports from Russia and probably Iran to name but a couple of sanction busters. Shaking this dependence is surely high on the agenda.

In its recent World Energy Outlook, the IEA talks on how China’s slowing economic growth will lead to less fossil fuel demand and predicts an energy use peak at or around 2025, which oddly coincides with the year of China’s purge of its worst oil infrastructure polluters. China’s production of solar panels, lithium-ion batteries and even the chemicals that are used in their production is likely to be the largest in the world. China’s population does not have the same love affair with gasoline driven cars, its high proportion of EV vehicles is well documented. China’s push for alternative energies is a strategic one, no matter how it is dressed up as planet saving. History tells us that China has a mindset of long termism, and energy independence would seem a favoured goal. Those of an oilie persuasion probably need not worry about the off switch being clicked, for China’s place in the oil puzzle is not about to disappear and certainly not in the time frame of the ideologically driven forecasts of the IEA, but it is nonetheless worthy of continued consideration.

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