China Over Delivered but Oil Underwhelms

China over delivered but oil underwhelms yet is still holding above key support levels, states Phil Flynn of PRICE Futures Group.

China's GDP beat expectations coming at 4.5% in the first quarter, but it was signs of robust oil demand that should be garnering the oil trader’s attention. Chinese oil refineries broke records, refining 14.9 million barrels of oil a day. While some are showing concern that a drop in Asian refining margins could be signaling a softening in demand, the big picture with China’s growth still suggests a market that is undersupplied.

Reuters reported that the drop in refinery profits is being led by a contracting margin for gas oil, the base for diesel and jet fuel, with a ten ppm gas oil margin dropping for a seventh session on Monday. The margin declined to $14.25 a barrel on Monday, the lowest since January 2022 and down 63% from the peak so far in 2023 of $38.89 on January 25. Yet while I believe that could be cause for concern, it may also be based on the fact that winter demand for gas oil was extremely low due to a warm winter and not so much because of economic weakening.

Gasoline prices edge higher again, and the US should see drops in crude and gasoline supply despite a preplanned 1.6-million-barrel release from the Strategic Petroleum Release. That lowers the amount in the SPR to just 380 milling barrels. The Biden team is getting nervous about the reserve. Not only are there concerns about the salt dome's integrity but also whether oil will get cheap enough for them to repurchase it. But what they really fear is another gasoline price spike that will hurt them politically. Look for them to blame the oil companies and not take any responsibility for their policies. Biden’s attempt to replace cars with internal combustion engines will reduce investment in much-needed refining capacity and production, so gasoline is going to become very expensive. AAA said the gas price for regular unleaded went up to $3.766 a gallon. Diesel up to a painful $4.201 a gallon.

The Russian price cap is falling apart as we all knew that it would. The US is upset and they say they are watching. The Office of Foreign Assets Control (OFAC) put out an alert to warn US persons about possible evasion of the price cap on crude oil of Russian Federation origin (Russian oil), particularly involving oil exported through the Eastern Siberia Pacific Ocean (ESPO) pipeline and ports on the eastern coast of the Russian Federation. Yet I wonder if they will enforce the Russian price ban better than they have oil sanctions on Iran that have fallen apart.

The Wall Street Journal reports that “As Russia scours the globe for buyers of its energy products, it is finding eager trade partners in an unlikely place: The oil-rich petrostates of the Persian Gulf. Since Western sanctions over the war in Ukraine cut off Russia from many of its established trading partners, state companies from Saudi Arabia and the United Arab Emirates have stepped in to take advantage of discounted prices for Russian products, according to oil executives and industry analysts. Despite US objections, the Gulf countries are using the discounted Russian products internally, including for consumption and refining purposes, and exporting their own barrels at market rates, boosting their profits.”

Last week I reported a piece about the IEA versus OPEC. I pointed out how the International Energy Agency's criticism of OPEC was somewhat laughable especially because it was the International Energy Agency's policies that drove up energy prices. Now OPEC responds in an exclusive interview with Energy Intelligence. Here are some highlights from the Interview.

Q: The IEA’s latest Oil Market Report (OMR) blamed Opec-plus for the “surprise supply cuts announced on April second” and highlighted that they “risk aggravating an expected oil supply deficit in the second half of 2023 and boosting oil prices at a time of heightened economic uncertainty.” What is your response?

A: First of all, this is not the first time the IEA has criticized Opec and Opec-plus. Unfortunately, it has become like a broken record, yet time and time again, market fundamentals prevail, and Opec’s more accurate forecasts and decisions prove to be the correct ones it is the sovereign right of the countries to voluntarily adjust their production in what is clearly a “precautionary measure.”

Er said “Misrepresenting such actions and continuously leveling baseless criticism is counterproductive and can only lead to more volatility and market instability. We at Opec and Opec-plus focus entirely on market fundamentals and complement that with regular and transparent dialogue with consumers and all stakeholders.

Q: The latest announced production adjustments were also described as risky for the global economy and oil consumers. What do you say to that?

A: There are so many factors affecting the global economy. The most recent banking problems are just one example, and rising inflation rates in many parts of the world are another. These have been exacerbated by specific policy measures. Other energy markets have been far more volatile than oil markets, mainly due to the stabilizing role of the Opec-plus group. Therefore, blaming oil for inflation is an argument that does not hold. This can be seen clearly when looking at the core personal consumption expenditures index, which excludes prices of food and energy. In fact, the main reason for increasing energy volatility is actually due to years of underinvestment, due to repeated calls to stop all investments in the oil industry. As you are aware, this is an issue that we at Opec have been cautioning against for many years. On the contrary, we believe that our efforts in stabilizing the global oil market benefit the world economy in the medium to longer term, as they encourage investments and allow for more spare capacity, thus avoiding potential price spikes that in turn would seriously harm the global economy.

Q: In the medium to longer term, what are the challenges facing the global oil industry?

A: I want to take this opportunity to reiterate the importance of the DOC to preserving the stability of the global oil market, and to commend all the countries involved in its continued success, now in its seventh year, despite all the enormous challenges. Opec also places great importance on objective and balanced discussions in addressing future energy challenges. Whilst addressing important issues such as climate change and energy transitions, the world must also ensure that investments desperately required must materialize in order to have all sources of energy needed to secure future global economic growth and attend to sustainable development and eradication of energy poverty. Therefore, I would caution, again and again, against continuing to spread misguided narratives on the need to stop investments in the oil industry. Such actions can only lead to further energy security issues, as well as significantly higher energy volatility in the future with negative implications for consumers, producers, and the world economy. Allow me to finish by saying that we need to work with each other; not against each other. At Opec, we believe that engaging in constructive dialogue with all stakeholders is the key to overcoming future energy challenges.

Quantum Commodity Intelligence reports that “Competition for customers between developers and escalating costs are hampering efforts to ramp up LNG projects in the US, despite the gap left by sanctions on Russian natural gas into Europe, according to an article published by the Financial Times Monday. While a number of projects, together worth $40bn, have reached the crucial “final investment decision” milestone since Russia’s invasion of Ukraine, other new builds have faced prolonged delays, amid spiraling costs and competition to secure the long-term purchase agreements needed to underwrite projects.

But several projects are set to go ahead, however, including Sempra’s 13.5mn tonnes a year plant in Port Arthur plant in south-east Texas, while Venture Global is moving forward with the second phase of its 20mn tonnes/y Plaquemines plant in Louisiana. Last year Cheniere was greenlighted for a 10mn tonnes/y expansion of its facility at the Corpus Christi terminal in Texas.

Learn more about Phil Flynn by visiting Price Futures Group.