March 17

Oil’s Rout Shows China Demand Hope No Match for Macro Collapse

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​This year the oil market has seen a tussle between those believing China’s demand will surge and others worried about an economic slump in Europe and the US. On Wednesday, the bears won.Oil tumbled to a 15-month low amid a banking crisis that’s expanded to Credit Suisse Group AG and rippled through markets after trading in a relatively narrow range, but the warning signs have been building for much longer.

For much of 2023, US crude stockpiles have been expanding and a flood of oil shipments overseas has kept other markets well supplied. Russia’s exports have remained stubbornly resilient, despite a pledge to reduce output, while strikes blocking refineries in France are hobbling demand.

The question now is whether the worst is over for crude. The answer depends on how successfully authorities can protect the financial systems in Europe and the US, though the rout has caught the attention of at least one OPEC member as investors watch for a potential response from the producer group.

“The latest market retracement feels overdone, unless a 2008-style contagion runs uncontained,” RBC Capital Markets LLC analysts including Michael Tran and Helima Croft wrote in a note to clients. “True physical tightening, particularly in the North Sea, needs to occur before the paper market can rally.”

Oil Positions

Brent oil tumbled below $75 a barrel this week, while West Texas Intermediate closed under $68 on Wednesday. Both contracts steadied during Asian trading on Thursday after the three-day rout.

Part of the selloff has been one-sided oil market positioning. Money managers and other speculators had the most bullish bets relative to bearish ones in four years in the week to March 7.

The probable unwinding of those positions helped to push both Brent and WTI out of the ranges they have been trading since December, exacerbating the pace of selling in the market. Coupled with a string of bearish options flows, the market’s bank-driven slump grew deeper.

“The technical damage to oil charts this week, coupled with negative momentum, have likely emboldened the bears,” said Ryan Fitzmaurice, lead commodity index trader at Marex. “Oil will likely remain volatile and flow driven.”

Chinese Demand

The debate over the health of the oil market may be tilting in favor of a weaker outlook in the US and Europe, but there are still signs of strength in Asia, most notably China’s rebound from Covid restrictions.

Chinese refiners have been snapping up barrels from the Middle East and the US, and ramped up processing at the start of the year after the country’s Covid Zero policy was ditched. Premiums for Dubai crude have surged over recent weeks, even as other parts of the world lag behind.

In contrast, though, oil in Europe has been showing signs of weakness lately, driven in part by the French strikes and strong US flows. The world’s largest economy last week shipped 5.03 million barrels a day, the third highest level on record, another ominous sign for already-weak North Sea prices.

The International Energy Agency on Wednesday said the market was already in surplus due to stubborn Russian output, but attention is still firmly fixed on the banking troubles, as Credit Suisse received a central bank lifeline.

“To some degree, we are seeing the market itself marking to changes in short-term fundamentals,” Francesco Martoccia, an analyst at Citigroup Inc. wrote in a note to clients. “However, the market appears to be a far cry from 2008” and the drop “could be presenting buying opportunities,” he added.

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