After recording the worst monthly loss this year in August, oil markets have started trading in September with a much brighter note on a trifecta of positive developments. Crude oil prices have been rising since OPEC + agreed maintain its current production agreement, in fact, it maintains the 400,000 bbl / day rise forecast for October, indicating that markets are healthier than previously feared. Reuters has also reported that OPEC + will increases the forecast for growth in oil demand in 2022 to 4.2 million bbl / day from its previous outlook of 3.28 million bbl / day.
Meanwhile, the latest data from the Energy Information Administration (EIA) shows that U.S. crude inventories fell much more than expected last week, although domestic production rose to a 15-month high. U.S. crude inventories fell 7.2 million barrels to 425.4 million barrels, 6% below the five-year average.
But the most encouraging news so far is that crude demand in China has begun to show signs of a strong recovery after the country reopened its economy and Beijing is close to finalizing a probe into its independent refiners, allowing so the so-called teapots remain important raw.
After nearly five months of slower purchases due to the scarcity of import quotas, the COVID-19 blockades that silenced fuel consumption and high inventory discounts, the demand for crude spot by the The world’s leading commodity importer is on a recovery path.
Locking facilities
Since April, weak consumption in China, as well as a sharp drop in Chinese refining production to a 14-month low, have depressed crude oil base prices from West Africa and Brazil to a multi-month low.
But now analysts say Chinese crude importers are stepping up purchases and even paying higher premiums to secure supplies from November thanks to the removal of blockade restrictions.
Source: Bloomberg
About a month ago, Beijing authorities again imposed massive closures by reducing public transportation and taxi services in 144 of the areas most affected by the delta variant nationwide, including train and subway services in Beijing.
This seemed excessive, with less than 1,000 cases of the delta virus reported across the country and a good 61% of the population already fully vaccinated. Still, Beijing opted to use its targeted blocking method that has been successful in stopping no less than 30 outbreaks of Covid-19 in the past. The capital of Beijing implemented quarantines for visitors to high-risk areas, stopped the use of community spaces for entertainment and also limited the number of visitors allowed to parks and scenic areas.
Chinese authorities also urged people to cancel vacations and business trips, especially those in high-risk areas, and also advised college students to delay their return to school during the new semester.
“Vaccination is not the same as going into a safe or carrying a talisman. Personal protective measures cannot yet be relaxed and vaccination cannot replace containment measures. We hold on until we get the final victory against the outbreak,Qi Jinli, deputy director of the Beijing Covid-19 response working group, said at the time.
Well, it looks like Beijing has outdone itself, once again.
“Evolution outside China revives expectations that oil demand will start to rise againsaid Phil Flynn, a senior market analyst at Price Futures Group Inc., on Bloomberg.
Return of the teapots
Three months ago, in a dramatic reversal of fortunes, Beijing announced huge cuts in import quotas for the country’s private oil refineries. According to Reuters, China’s independent refiners were awarded a combination of 35.24 million tonnes in crude oil import quotas in the second batch of quotas this year, a reduction of 35% compared to 53.88 million tonnes in a similar stretch a year ago.
The large reduction occurred as part of a government repression in Chinese private refineries known as teapots, which have become increasingly dominant in the last five years. This was intended to make Beijing more precisely regulate the flow of foreign oil, as it is duplicated in bad practices such as tax evasion, fuel smuggling and violations of environmental and emissions regulations by independent refineries.
The measure was also intended to regain control of China’s crude oil refining sector, from private refiners to state-owned refineries. And he recalls his previous crackdown on major technological operations that became dangerously powerful and were threatened by party politics.
China’s teapots have been steadily gaining market share from established state actors such as China Petroleum and Chemical Corporation (NYSE: SNP), also known as Sinopec, i PetroChina Co. (NYSE: PTR) since Beijing partially liberalized its oil industry in 2015. Teapots currently control nearly 30% of China’s crude oil refining volumes, compared to ~ 10% in 2013.
But now traders are optimistic that Beijing will soon wrap a probe over teapots. In fact, a fourth batch of quotas is expected to be issued in September or October, which could revive demand for independent refiners.
Another thing that works in favor of teapots is that the crude stocks of China’s domestic oil companies are very low and that private refiners could help save the deficit. Imports into China’s Shandong Province, where most teapots are located, fell below 3 million barrels in both July and August, compared with an average of 3.6 million barrels during the first half of 2021.
China’s central bank has also said it will try to stabilize the credit supply and increase the amount of money that support smaller businesses. There are expectations of new stimuli targeting the infrastructure, manufacturing and real estate sector after the July slowdown left the economic situation looking bleak.
By Alex Kimani for Oilprice.com
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