China’s oil stockpiles are near a record despite the return of traffic jams and rising industrial activity. America’s inventories are slumping even though people don’t seem to be driving much. Opec and allied producers are still withholding millions of barrels from the global market to avert a glut, but there are indications some exporters are wavering in their commitment to the pact.
The oil market, whipsawed by some of the most violent ups and downs in its history in the first of half of the year, is a muddle of contradictions as traders size up prospects for the rest of 2020. As prices stick to a narrow range near $40 a barrel, some of the biggest commodity houses including Vitol Group, Trafigura Group and Mercuria Energy Group have diverging views about what’s next.
The most important factor will be Covid-19 itself: Cases are surging again in the US and Europe, two vital demand centres. While Asia, in particular China, is faring better in terms of how the disease is being coped with, the economic impacts of the virus will nevertheless be felt for years.
And, what about a vaccine? Goldman Sachs Inc says it’s worth betting on jet fuel prices strengthening because one will likely be found and people will start flying again. Should jet fuel surge, then one of the great weaknesses of the current global oil market – diesel – would get a sudden boost, alleviating huge amounts of pressure on the world’s refiners.
“The market is stuck,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. “For prices to rally, Opec+ spare capacity needs to drop, and to see that, demand needs to recover further. As long as there’s not a second global lockdown, oil can’t fall too far below $40” because that would discourage growth in oil output from nations outside of the Opec+ alliance.
As the world’s biggest oil buyer, what happens in China is critical. The nation’s imports slowed following a cargo-buying frenzy earlier this year. Despite the drop in imports, stockpiles in the country rose to 72.7% of capacity in the week-ended September 24, according to the satellite tracking company Ursa. That’s just shy of an all time high of 73%. They have risen in 15 of the past 19 weeks, steadily climbing since May, the firm’s figures show.
While that may not look like a country in a rush to buy cargoes, there are also some very positive end-user demand figures. Traffic congestion in the ten largest Chinese cities rose last week to the highest since late January, settling at 5% above the 2019 average, according to data from satellite navigation company TomTom International BV. To be sure, gasoline isn’t as important to overall oil consumption in China as it is in the US.
It’s uncertain where all that will ultimately leave the nation’s crude buying, which has become a key support for prices since the pandemic hit. At the moment, a few of China’s independent oil refineries, so-called teapots, are asking for additional quotas from the government to be able to purchase extra crude. The extent to which those are granted will have a big say on future imports. For the time being, it appears there may be little change, according to Li Li, an analyst with ICIS-China.
The picture in the US is different. Crude inventories have dropped by 46.3mn barrels since peaking for the year in mid-June. While that’s a much faster decline than normal for the time of year, it’s also the case that stockpiles remain at seasonal records – at a time when oil demand has clearly slumped.
Part of the drop in inventories has been a down-trend in production. Output has slumped by about 2.4mn barrels a day since peaking in February, according to data from the US Energy Information Administration. To put that into context, Kuwait pumped 2.27mn barrels a day in August, according to estimates compiled by Bloomberg.
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