Cold War Concerns Weigh on Oil Market

July 24, 2020 10:12 AM
Tensions are raising fears of a cold war and perhaps a new trade war
Chinese refinery runs in July most likely hit record highs
Eurozone flash PMI grew faster than forecast
Energy Report



The Phil Flynn Energy Report 

Summer Heat

U.S. tensions with China are heating up. At the same time, so is manufacturing and service sector data across Europe, not to mention record runs at Chinese oil refineries. Oil and  products weakened on new Covid-19 cases and the growing cold war between the U.S. and China. Yet oil seems to be coming back as economic data is blowing out to the upside. Chinese refinery runs in July most likely hit record highs as companies lift average run rates to 84% of capacity.

After the U.S. State Department ordered China to close the consulate in Houston, it raised the risk of another trade war. Now China in retaliation today, has ordered the U.S. to close its consulate in Chengdu. The tensions are raising fears of a cold war and perhaps a new trade war, but the market is hoping that both sides will now try not to escalate the tensions. The issue of stealing intellectual property and hacking haven’t gone away. The U.S. should remain tough but at the same time, should hold China to their trade deal.

Yet oil can look beyond China tension because of E.U. and Chinese data that show quite clearly the global economy is recovering. The Eurozone flash PMI grew faster than forecast in July. The eurozone manufacturing PMI rose to 51.1 from 47.4 in June, and the services PMI rose to 55.1 from 48.3 in June, as the composite PMI of 54.8, a 25-month high, topped expectations of a 51.1 reading. We also saw the U.K. Markit Services PMI come in above expectations surging to 56.6 well above the 51.1 expected and deep in expansion territory. 

China's domestic refineries boosted oil refining in July at state-owned oil companies, which collectively account for 69% of the country's refining capacity to a 6-month-high of 83.6% this month from 80% in June, data collected by S&P Global Platts showed July 24. China's crude output jumped 9% year on the year to hit an all-time high of 14.14 million barrels per day in June, General Administration of Customs data showed. China bought vast volumes of crude oil cargoes purchased during the second quarter, and according to Platts this is a sign that demand for products in China is high. They say that independent or “teapot” refinery run rates remain high despite declining slightly from June amid narrowing margins. They account for about 31% of China's refining capacity.

This data suggest that the recent increase in oil price hasn’t just been based on speculation but solid evidence of demand. The tightening supply situation in Europe that has driven Brent has shown an incredible v-shaped recovery. While we have a long way to go and there are fears that Covid-19 will reappear, it appears that the demand growth and economies are finding a lot of ways to work around and with the Covid curse. It also suggests that the oil market’s recent price resiliency is justified, and despite a big crude build in the U.S., it’s still on a path to tightening global oil supply.

Hanna, Gonzalo, and a storm to be named later will no doubt mess up oil imports and exports in the coming weeks. The Atlantic and the Gulf of Mexico is dealing with 3 storms. Tropical Storm Gonzalo is expected to become a hurricane Friday as it moves west toward the Windward Islands of the Caribbean. Tropical Storm Hanna formed late Thursday in the Gulf of Mexico, about 385 miles east, southeast of Corpus Christi according to the 10 p.m. advisory from the National Hurricane Center. It has maximum sustained winds around 40 mph and was expected to make landfall along the Texas coast Saturday. A tropical storm warning for Hanna was in effect from the mouth of the Rio Grande to San Luis Pass, Texas, forecasters said. A tropical storm watch was, in fact, from San Luis Pass to High Island, Texas. 

And to add to that weather news there’s a tropical wave off of the West Coast of Africa that is expected to move westward across the Atlantic and could become a tropical storm sometime next week. USA Today writes that, "While 2020 has been crushing records for earliest named storms in the Atlantic, including Cristobal, Edouard, Fay, and Gonzalo, hurricane experts noted that the storms so far have been weak and short-lived." Regardless it will still be messing with the oil data! Just saying.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.