Why The Reopening Of China’s Markets Hasn’t Boosted Global Oil Prices


Digital Zeitgeist – Why The Reopening Of China’s Markets Hasn’t Boosted Global Oil Prices

A Large Comeback In Energy Consumption Is Still Weeks, If Not Months Away, Despite The Fact That China’s Exit From Covid-19 Zero Policies Sparked Rumours Of A Demand Boom From Some Of The Market’s Biggest Players.

Instead, the global oil markets have started the year looking a lot like they did at the end of 2022,  oversupplied, due to a mix of sluggish demand and robust production, while also battling with lighter trade volumes than has typically been the case in the past.

Because there has been a spate of unanticipated outages, the consequence is a market that is prone to huge fluctuations, making it difficult for dealers of physical oil barrels to forecast which direction prices could be heading in the future.

“To me, the market is oversupplied by at least 1 million barrels a day,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. “We are going to have large stock builds. In a couple of weeks you’re going to be building 10 million barrels a week, how is the market going to handle that?”

The near-term glut is being aggravated by a swath of US refinery shutdowns following a recent cold frost. Listed below are some of the reasons why the oil market isn’t yet enjoying the advantages of China’s significant reopening:-

  • The Big Freeze

A severe cold snap hit large sections of the United States just before Christmas, requiring fast shutdowns of refinery capacity across the country. Around forty percent of the capability for processing crude oil in Texas was idled at its height, and a portion of that capacity was expected to stay down throughout the first week of 2023.

“We’ve seen these big freeze-offs in the US and that has meant that the crude balance has actually weakened,” Amrita Sen, chief oil analyst consultant at Energy Aspects Ltd., said in a Bloomberg TV interview.

  • Global Slowdown

The potential for a simultaneous slowdown in economic growth in the United States, Europe, and China continues to be a source of concern for the future of global consumption. On Tuesday, data from the manufacturing sector revealed that China’s economy experienced a sharp downturn in late 2022. In recent days, there has been an increase in mobility as Covid restrictions eased, nonetheless, there are still fears that the most recent spike in infections may lead to a further slowdown in economic activity.

Wednesday brought disappointing manufacturing data from the United States, which indicated a continuation of the industry’s downward trend. Data from Europe likewise revealed a decline for the month of December.

  • Seasonal Weakness

Usually, the accumulation of stocks occurs within the first three months of the year. Even before the effects of the cold snap in the United States and the subsequent refinery closures were known, the most current prediction by the International Energy Agency (IEA) anticipated that oil supply would be around 600,000 barrels a day over the usual demand in the first quarter.

As a direct result of this, mild weather over much of the West has helped ease some of the strain that has been placed on energy markets to satisfy the need for heating. According to the National Oceanic and Atmospheric Administration (NOAA), above-average temperatures are forecasted to prevail throughout the majority of the United States from the 10th through to the 16th of January.

Earlier, there was a scarcity of natural gas, which caused some power production units to convert from using gas to using oil. This contributed to an increase in crude oil demand.

  • Technical Trouble

Because of rising volatility and margins, open interest in the oil market is at a multi-year low, which has caused the oil market to struggle mightily with inadequate liquidity in recent months. As a result of the reduction in supply, market prices are now more likely to be subject to significant fluctuations on days when technical traders, also known as commodities trading advisors, or CTAs, dominate trading.

This week, US crude futures made a momentary break above their 50-day moving average before falling back below that level. This move prompted more technical selling since it was a bearish indicator for the market. According to sources actively involved in the market, CTAs were also selling oil during Wednesday’s price decline. They also highlighted that momentum-driven selling was contributing to the rout in the market.

  • Demand Destruction

“The abrupt lifting of Covid-19 restrictions and testing requirement since early December and the strong resurgence of infections subsequently have caused demand destruction in recent weeks, especially for gasoline and gasoil,” according to a note from FG Energy (FGE) consultants, referring to China.

The industry specialist noted that while big cities such as Beijing, Shanghai, and Guangzhou have passed their Covid peak, increased infections in inland and rural areas would restrict the demand upside in the short term.

Because Beijing has awarded another hefty allocation of gasoline export quota to refiners this year, market participants and experts have speculated that the majority of the demand increase from China would occur in the latter months of the year.

online sources: bloomberg.com, yahoo.finance.com, energyaspects.com, iea.org, fgenergy.com