FIS: Crude Oil Market Overview: Question marks over Chinese demand weighs on market
Nearly 200 new cases of Covid-19 have been detected in the Chinese capital after restrictions were lifted last week. Due to the last lockdown measures in April, retail sales fell by 16% year-on-year and property sales dropped 25%.
China's May exports may have jumped 16.9% from a year earlier as Covid curbs were eased and allowed some factories to restart, but the concern now is that the prospect of a reintroduction of curbs could dent future output and oil consumption. Traders had already built in a return to work in China into prices, and so the news of increased cases has poured bearish sentiment onto the market.
Average daily discharges into China are now at their lowest levels this year, down over 22% on average January discharges. The concern over the reintroduction of lockdown measures in Chinese cities could prolong the return of higher Chinese demand later into the year.
Despite the U.S. Government encouraging its domestic oil producers to increase production, they have not been having much impact on the total amount of American oil being put into the market. Since the decline at the beginning of the pandemic, U.S. monthly oil production has not breached the 12 million bpd seen in the initial months of 2020.
U.S. rig counts have been growing, having breached the 500 mark so far this year. However, this is a long way from rig counts of over 1,500 that were seen in 2014. The FT reported that Moody’s predicts that private operators will look to increase investment by 49% this year to try to grow output by 12%. Contrastingly public companies are expected to only increase output by 3%.
Another factor to consider, especially for domestic refined product levels in the United States, is the balancing act on the use of crops for biofuels. With Ukrainian and Russian grain supply disrupted, the World Resources Institute estimates that a 50 per cent reduction in the grain used for biofuels in Europe and the US would compensate for all the lost exports of Ukrainian wheat, corn, barley and rye.
More of Libya’s oil fields continued to be closed with ANZ Research analysts citing Libya’s oil minister Mohamed Aoun saying production in the country dropped to 100,000 barrels per day from 1.2 million bpd last year.
Despite the OPEC+ announcement of a bigger-than-expected output increase of 648,000 b/d in July and August from 432,000 b/d, the markets were skeptical that sanctioned Russian output could be offset with higher production from other OPEC+ members.
Technical view of the crude oil market:
August Futures – A bit of a mixed technical last week as the futures remain in bullish territory, having produced a takeover candle on the 08/06. This suggested we should trade above the USD 125.28 fractal resistance. However, the U.S CPI figures on Friday put the intraday technical into neutral territory due to the deep pullback.
The daily technical is still bullish as we remain above our key support at USD 112.36. If we trade below the USD 118.55 level, then the support has the potential to come under pressure. Likewise, a close below USD 120.45 will warn that the USD 118.55 support has a higher probability of being tested and broken.
Upside moves that trade above the USD 124.40 resistance would suggest we trade above the USD 125.28 fractal high. A close above this level will target the USD 127.27 and USD 131.30 resistance levels. The technical is bullish, but in a corrective phase with near-term support levels looking vulnerable. If they hold then we have the potential to see upside continuation.
Written by Edward Hutton, Edited by Chris Hudson (https://freightinvestorservices.com/fis-live/).
