China Is Sitting In the Demand-Driver's Seat

September 1, 2020 07:56 AM
China imported a record amount of oil last month
Chinese manufacturing activity beat expectations
U.S. oil and natural gas production is up
Energy Report



The Phil Flynn Energy Report 

China Drive

It’s like the old days. China is driving global oil demand, and that’s supporting prices. China not only imported a record amount of oil last month, economic data coming out of China suggests that demand should continue.

The August reading of China's services industry hit its most substantial level since early 2018, while the expansion in manufacturing activity beat market expectations. Chinese manufacturing activity in August is expanding at the fastest pace in nearly a decade, with the Caixin/Markit manufacturing PMI coming in at 53.1 for the month. The PMI for services rose to 55.2 from 54.2 in July, according to the National Bureau of Statistics.

U.S. production of oil and gas ticked up, but OPEC laggard production levels should come down. Reuters reported that U.S. oil output rose 420,000 barrels per day (bpd) in June to 10.436 million bpd, the EIA said in a monthly report on Monday. Production remained far below April levels of 11.99 million bpd. Output in June rose in top oil-producing state Texas by 227,000 bpd and also rose in North Dakota while dropping 49,000 bpd in the offshore Gulf of Mexico, the report said. U.S. oil output had fallen sharply in the previous month as producers had scaled back as oil prices sank and demand fell due to the coronavirus pandemic and global oversupply.

Monthly gross natural gas production in the U.S. lower 48 states, meanwhile, rose 1.6 billion cubic feet per day (bcfd) in June to 99.1 bcfd, rising from its May level, which was the lowest monthly average since October 2018, according to the EIA 914 report. In Texas, the most significant gas-producing state, output rose by 0.9 bcfd. A lot of the gas in Texas is associate gas from oil production. In Pennsylvania, the second-biggest gas-producing state, output rose 0.3 bcfd to 18.96 bcfd in June.

International Oil Daily wrote that, "Several OPEC+ members had submitted plans to make additional ‘catch-up’ cuts in their oil output to compensate for their cheating during the first few months of the alliance's historic production cuts.” The cheaters like Iraq, Kazakhstan, Equatorial Guinea, and Brunei have put in plans with the OPEC Secretariat. Iraq reportedly is going to cut output by 400,000 barrels per day under quota in August and September, and Kazakhstan will cut of 94,500 bpd over the same 2-month period. They also reported that Abu Dhabi National Oil Co. told its customers on Monday that it will cut its volume allocations to term customers by 30% in October, compared with cuts of 5% relative to nominations in the preceding months.

The longer crude stays in this range, the bigger the potential move when it breaks out. The API weekly report may not be decisive because of Hurricane Laura's impact. 

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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.