Chinese crude demand drops

Project China

In futures, one day you are in and the next day you are out. Oil traders wanted data from China to wow them but that failed. The oil bulls have all of their hopes and aspirations tied up into expectations of strong China demand and when they fail to blow us away, well the bulls have to leave the runway. China GDP number just barely met or exceeded market expectations and for a market that lives or dies on China surprising us, it just was not enough. It bored us. At the same time in the aftermath of the Chinese’s government increasing interest rates the higher than expected 3.6% rise in the Chinese Consumer Price index should increase the odds that we will see more moves by the Chinese to try to reign in what they are starting to see as an inflation problem.

Oil bulls also had to be dismayed by the fact that despite the fact that the Chinese imported a record amount of crude last month, it seems it went into storage as opposed to the refinery. Data from the China Mainland Marketing Research Company showed that China processed 8.5 million barrels of oil a day which according to Bloomberg News was the smallest increase since March of 2009. A sign that demand may already be slowing in China at a time when the Chinese government is already directly trying to put the brakes on gasoline demand by increasing domestic gasoline prices. The oil bulls fully expect China to exceed expectations. That did not happen.

Add to that increasing pressure on the Chinese to let their currency rise and that could be another element that cools Chinese oil demand. The G-20 is meeting and according to Dow Jones Newswires, a proposal among the Group of 20 industrial and developing nations to target cuts in current-account imbalances, meant to avert a "currency war," is itself running into opposition from big exporting nations. The United States and South Korea, host of a two-day G-20 meeting, are championing the idea of commitments to bring surpluses and deficits below specific levels. This could be a way to get countries like China, which are skittish about making commitments on currency policy, to agree to binding targets aimed at "rebalancing" global growth away from an over-reliance on U.S. consumers. But Japan and Germany, whose export-led growth models have built up major trade surpluses, are opposing such a solution at the meeting of G-20 finance ministers and central bankers in Gyeongju. "The idea of setting numerical targets is unrealistic," Japanese Finance Minister Yoshihiko Noda said. Japan and Germany say their governments can't engineer such macroeconomic outcomes that are mostly determined by the economic activity of private companies and individuals." Oh Come on! Make it work people!

As I reported previously the French Strike over pension benefits is impacting U.S. supply. Reuter’s news reports, “ U.S. exports of fuel to Europe have surged by up to 20% in recent weeks as refiners take advantage of an arbitrage window created by French port and refinery strikes, according to shipping sources. One tanker operator said U.S. exports of diesel have jumped to 600,000 barrels per day, up from around 500,000 bpd a few weeks ago, supported by rising European demand as the strike at France's main oil hub of Fos-Lavera nears its 25th day. With the vast majority of diesel shipments headed across the Atlantic, U.S. exports to Europe may be at their highest levels in at least five years.”

Depending on the U.S. port of origin, tankers can reach Europe in as little as 11 days. The export opportunities are a boon for U.S. refiners whose margins have been battered by weak fuel demand; helping keep U.S. refined product stocks well above five-year average levels. The Asia-Europe arbitrage is closed, after being open for the first two weeks of the strikes. However, traders said the economics of moving U.S. distillates to Europe remain favorable. Brokers have recorded at least five charter tankers of distillate bound for Europe from U.S. Gulf Coast and East Coast locations since Friday. Each ship can carry around 300,000 barrels. Several other charters may not yet be listed, they said. Larger exports helped to boost product tanker rates by 10 word scale points, or 11.8%, to 95 WS last week, brokers said. Two charters were booked from the East Coast to Europe at 90 WS on Tuesday, down slightly from the earlier rates. Several shipments are for ultra-low sulfur diesel (ULSD), sources said. While the distillate does not meet European specifications for road use, it can be used for home heating. Other shipments, including the Chevron charter, are not specified by product, the sources said. U.S. traders said that the country's refiners would be unlikely to send gasoline to Europe, which usually has a surplus of the fuel. U.S. refineries would also have trouble meeting European gasoline specs. Still, U.S. East Coast gasoline inventories may fall as the strikes cut European exports, which have already been falling in recent years.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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