Welcome to the tracking oil edition of Oil Markets Daily!
Oil market rebalancing is underway with global oil inventories including oil-on-water falling at a clip of -4 mb/d for the first two weeks of July.
With demand recovery underway globally, refinery throughput has started to pick up but lingering concerns on rising COVID-19 cases and weak refining margins continue to weigh on traders’ minds.
In particular, one of the issues with the oil market today as we noted in our OMF to subscribers is that China has overbought way too much crude in March and April.
Not including land imports, China’s seaborne imports are ~3 mb/d higher than last year’s. Refining capacity did not increase anywhere close to this, so the excess crude is going into onshore storage. But given that demand is still recovering in China, most of this overbought crude is being stored offshore via floating storage.
In particular, China’s floating storage alone explains the entire excess of the global floating storage today.
Now given that the Chinese took advantage of low oil prices, this implies that if demand does not recover soon for the Chinese, then future crude buying would be reduced resulting in a slower rebalancing. This is because if China reduces buying say by ~4 mb/d, then the excess will have to be absorbed by the West.
Some good news is that despite the record amount of imports we are seeing in China, global onshore inventories are indeed falling. We are starting to see this in the US and other OECD countries.
For OPEC, the Saudis, in particular, are well aware that the Chinese took full advantage of low oil prices. As a result, Saudi Arabia has been increasing OSP to China and other Asian buyers to start chocking off flows to the east. This will help smooth the rebalancing in Asia by forcing refineries there to absorb the excess crude before buying more expensive crude.
So for now, the rebalancing continues and remains on track for July. But for oil watchers, excess buying from China could serve as a potential headwind later in 2020 if oil prices start to rise materially.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.