Commodity Trade Mantra

Oil Prices Supported by China’s Strategic Reserve Hoarding

Oil Prices Supported by China's Strategic Reserve Hoarding

Oil Prices Supported by China’s Strategic Reserve Hoarding

With a lack of overnight economic data to consume, we are left to reflect on yesterday’s Federal Reserve decision to keep interest rates at 0.25%. While their justification to do so seems understandable – a lack of inflation remains concerning as does economic weakness in emerging markets – what is most curious is the negative response by the crude oil complex. Despite a weakening dollar (a stronger dollar was highlighted as another pillar of pain upholding the decision not to raise rates), oil prices have shown downside movement ever since. It raises the question: what would prices have done if they had raised rates?!

WSI has released its winter weather outlook, amid a backdrop of a strong El Niño. An El Niño is a climatic change when sea surface temperatures rise in the Pacific Ocean, combined with high air pressure in the western Pacific and low air pressure in the eastern Pacific. The likely result is a warmer and wetter winter for parts of the US.

For the peak of the bleak mid-winter, WSI projects warmer-than-average temperatures for the West Coast and Northwest, as well as for the Upper Midwest. Colder-than-average temperatures are projected for the rest of the US.

What does this mean for energy? It leans modestly bullish for natural gas prices, given lower temperatures for the key heating regions of the East coast and Midwest. For the crude complex it is a bit more mixed; above-normal, damp conditions for the upper US should mean less inclement conditions and therefore more gasoline demand, although these inclement conditions could manifest themselves in the lower half of the US instead. A shift to natural gas-fired generation in the Northeast means an ongoing marginalized impact on heating oil demand. From a supply perspective, the prospect of lower temperatures in key producing regions could lead to freeze-offs for both oil and gas production.

Switching focus to China, and much is being made of China’s ongoing staunch level of oil demand amid a slowing economy and stumbling stock market. This is leading to an increasing number of accusatory fingers pointing to strategic stockpiling and the filling of storage, as opposed to underlying product demand strength.

We can affirm this view from the perspective of healthy imports. #ClipperData shows that waterborne imports into China continue to knock the socks off last year’s levels. Should oil imports keep up their pace for the rest of the month, they will be achieve their highest level since April, and imports overall will be up 14% year-to-date through the first three quarters of the year. Bargain-hunting? You betcha.

Nonetheless, #ClipperData shows us that storage builds this year are keeping pace with what we saw last year – up to nearly 90 million barrels:

Finally, in terms of where Chinese waterborne imports are coming from, approx. 65% of them come from the below six producers:



Courtesy: Matt Smith

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