Oil prices are modestly higher trying to balance signs that OPEC production cuts are going into effect and the impact of rate cuts in China where some major banks say their economy is faltering, states Phil Flynn of PRICE Futures Group.

Oil received support from reports by JODI that Saudi oil exports hit a five-month low against reports of reductions in exports from the UAE as well. Yet oil was being held back by Chinese economic concerns as Goldman Sachs and UBS both cut their 2023 China growth to 5.4% percent down from 6% and from 5.7% to 5.2% respectively. Wells Fargo also cut China’s growth prospects to 5.7% for this year. That is why China cut its key lending rates for the first time in ten months. The one-year loan prime rate (LPR) was lowered by ten basis points to 3.55%, while the five-year LPR was cut by the same margin to 4.20%.

Yet despite the slowing economy, China’s oil demand remains resilient. According to the CNPC, China’s crude oil demand increased by 2.3% from January to May and it’s expected to pick up speed in the second half of the year to 3.5% full-year growth to a whopping 740 million tons. 

Still, there are signs that Saudi Arabia is serious about staying ahead of any slowdown, assuming it happens.

Maybe China is boosting its economy by planning a new training facility in Cuba, raising the prospect of Chinese troops on American shores according to the Wall Street Journal. Remind me how President Biden’s foreign policy is keeping us safer. Is it his open border policy? Or maybe allowing the war in Ukraine? Or was it the pullout from Afghanistan or is it allowing the Chinese to build an Army base in Cuba? Maybe those Chinese balloons were just trial balloons.

Fox News did report that Chinese President Xi Jinping and US Secretary of State Antony Blinken met in Beijing Monday, shaking hands in front of photographers.  At a press conference afterward, Blinken addressed the media without Xi, telling reporters the relationship between their two nations constitutes “one of the most consequential in the world” and “both the United States and China must manage this relationship responsibly.” Maybe it’s just me but I sure wish Secretary of State Blinken would not look so scared when he talks.

Saudi crude exports hit a five-month low in April. Crude exports fell to 7.316 million barrels per day (bpd) in April, down about 3% from the 7.523 million bpd in March according to JODI.

Alex Kimani at Oil Price writes that after a six-year rift, the United Arab Emirates and Qatar have reached an agreement to restore diplomatic ties. The dispute emerged when the UAE accused Qatar of sponsoring terrorism.

Yet does the market care about crude? Crude is out and distillates are in. John Kemp at Reuters wrote that “Portfolio investors are rotating positions from crude oil to middle distillates—anticipating that the low level of distillate inventories will keep prices relatively firm even if the global economy and petroleum consumption slow.

Hedge funds and other money managers sold the equivalent of -21 million barrels of crude oil options and futures but purchased +18 million barrels of products, including +14 million of distillates, over the week ending on June 13. The biggest rotation has been from US crude to European gas oil, reflecting the rise in crude inventories in the United States while stocks of distillates, used heavily in Europe, remain well below the norm.

Also, while Saudi Arabia is cutting crude exports, they are increasing diesel imports. Saudi diesel imports rose by 71,000 bpd month-on-month in April, to the highest level since November 2018.

We think the market is still sleepwalking into a very tight supply situation. SPR releases are ending, global spare production capacity is tight, and investment in oil and gas is woefully inadequate.

Gasoline prices are staying high at the pump but not soaring yet. AAA says that the average for unleaded gas is $3.577 up from $3.540 a month ago but down from last week.

We need to start watching the weather. Fox Weather is reporting that “Tropical Storm Bret is forecast to become the Atlantic’s first hurricane of the season by late Wednesday. Fox Weather says that Bret will continue moving westward for the next several days and is expected to approach the Caribbean islands by the end of the workweek. Heavy rain, gusty winds, and a dangerous storm surge are possible in portions of those islands. It could start to impact oil and gas production as well.

Learn more about Phil Flynn by visiting Price Futures Group.