Investing.com — China kicked off the year with big oil purchases despite a worrying COVID situation. China’s actions appeared to focus more on storing crude oil than buying it for immediate use.
China has also increased export quotas for refined oil products for the first batch in 2023, suggesting weaker domestic demand is expected. Its focus is on the international market, where domestic independent refiners are more profitable processing Russian oil, getting cheaper by the day due to sanctions against Moscow in the West, and China Influenced by significant price reduction negotiations.
In a parallel universe, Saudi Arabia’s Aramco (TADAWUL:) oil company this week cut the selling price of benchmark Arab Light crude to a low not seen since November 2021. This was a calculated move to keep the Saudi barrel attractive amid sustained price cuts for Russian oil. After his G7 price cap for Russian offshore crude fell to $60 a barrel.
China, already the world’s largest oil importer, has bought 5 million barrels of crude oil, mostly from Kazakhstan, to collect from Black Sea ports next month, traders quoted by Bloomberg reported Friday. In terms of flows, it is the largest purchase of Kazakhstan crude since at least early 2021.
Kazakhstan’s oil is the property of European refiners and the purchase is significant, especially since mid-last year when European Union companies cut their purchases from Russia in the wake of Ukraine’s aggression.
The Chinese takeover also appears to be politically motivated, as Kazakhstan pivots from Moscow to Beijing. The Ukrainian invasion has raised concerns about which parts of the region could be next on Russia’s target list.
Physical traders report that Europe’s own demand for Kazakhstan’s oil, as well as Chinese buying, pushed the commodity’s price higher. So-called CPC blended crude from Kazakhstan rose to a discount of $3 a barrel to the Dated Brent, an international benchmark for physical oil trading. As recently as a month ago, the CPC blend was $8 below the Dated Brent.
China International United Petroleum & Chemicals Co (Unipec) also purchased at least 2 million barrels of crude for January loading from Norway’s Johan Sverdrup field. Johan Sverdrup crude, which he was down more than $6 in early December, is now $3-4 a barrel less than Dated Brent.
However, higher Kazakh CPC and Johan Sverdrup crude prices did not do enough to mitigate the Russian barrel price cut. Before we delve into Russian oil prices, let’s take a look at Chinese oil demand. This is an important factor when valuing crude oil.
China’s oil demand typically increases each year after the Chinese New Year, which is scheduled for the end of January this year. It remains to be seen how Beijing’s oil demand will fare as it transitions from zero COVID to Que Serra Sera COVID policy. Data from the week just ended showed China’s manufacturing activity contracted for the fifth straight month in December as the country dealt with an unprecedented spike in coronavirus cases.
Still, some bulls are hopeful that Chinese demand will pick up in the near term, pushing prices into triple digits.
“Despite all this talk about slowing demand, it’s happening because of higher prices. [U.S. interest] Phil Flynn, an analyst at the Price Futures Group in Chicago and one of Longside’s most vocal analysts, said: ” [supplies] It will be even tougher if normal weather returns, and will surge as China recovers from COVID lockdowns. ”
Some deny the idea.
“To me, the market is oversupplied by at least a million barrels a day,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors. “We are going to have a large stock build. In a few weeks he will be producing 10 million barrels a week. How will the market handle that?”
If China’s economy performs slower than expected, it could end up stockpiling the vast amounts of oil it buys today. Expansion of such storage could expand the oil contango. US crude and Brent crude are currently in contango. This makes sense for those looking to hold their futures positions by rolling out from the near-term to the next-closer, as longer term crude prices are priced higher than the nearest. It has become nothing. .
At Friday’s close, the contango between the February and March contracts for US crude was 27 cents a barrel. The difference between Brent in March and he in April was 18 cents. By historical standards, the price difference is small. However, they can grow if storage conditions expand.
China is producing more refined petroleum products for export to make up for weak domestic demand for crude oil. As a result, competition with other international refined product suppliers, including the United States, will increase, increasing pricing pressure on this front.
Over the past few years, the Chinese have been a major supplier of refined products to the Pacific market. But they abruptly cut refined production last year as domestic demand for oil dwindled — a decision Beijing’s powers probably lament.
“By limiting the capacity of independent refiners, China completely missed last year’s huge crack spreads in refined products,” said John Kilduff, a partner at New York energy hedge fund Again Capital. said. “China thought it was protecting its domestic oil market by cutting production, unaware that it was hurting its export market for refined products. .”
Meanwhile, “Saudis have woken up to the fact that Russians are having lunch,” notes Kilduff.
Russian Ural crude is currently being bought by Chinese and Indian buyers at around $58-$59 a barrel, while Brent closed below $79 on Friday. Meanwhile, traders say China is buying so-called ESPO crude oil from Siberia at prices above the G7 cap of $60.
ESPO crude – shipped on the 4,188 km East Siberian-Pacific pipeline – comes from oil fields in the Tomsk Oblast and Khanty-Mansi Autonomous Okrug in West Siberia.
According to Reuters, the spot discount on ESPO crude means that at least one January-arriving ESPO cargo will be sold to an independent refiner and sold free-of-float at a discount of about $6.50 a barrel to March ICE Brent prices. DES) base and expanded. The report cited two traders with knowledge of Reuters trading.
Other cargoes in the month were trading at a discount of about $5, up from a $4 discount the previous week, traders said.
Shandong-based oil trading sources said most Chinese refiners will soon complete their purchases of crude to be delivered ahead of the Lunar New Year on Jan. 20, so ESPO sellers could expect even slightly lower prices. Eager to clear the cargo on hand. .
“Chinese buyers are bidding lower because they now have more leverage in price negotiations,” the person said.
Again Capital’s Kilduff said the price war recently intensified after Saudi Arabia lowered its official selling price for Arab Light crude.
“By lowering prices, Saudi Arabia expects that those who want oil will soon be able to lock in, even on a deferred basis,” Kilduff said. “However, weak demand for spot crude could lead to an increase in oil storage, which is exactly what drives growth in Contango.”
Kilduff also said Russia’s bet on Ukraine didn’t work out as Vladimir Putin had hoped. “The Ukrainian crude oil premium is now only about $10 a barrel. A year ago it was about $30, and the pandemic-related supply chain disruptions put it at another $30 to $40. That’s what pushed oil to a 14-year high early in the season between $130 and $140.
Oil: market settlements and activities
New York-traded crude registered closing trade at $73.73 a barrel, up just 10 cents, or 0.1%, after officially ending Friday’s session.
WTI, known as the U.S. crude oil benchmark, fell 8.3% this week, marking its biggest weekly drop since the week ending Dec. 2. Worst weekly display after WTI fell 10% between Tuesday and Wednesday. His first two days of the oil trading year after 1991.
London-traded crude registered closing trade at $78.60 a barrel after formally ending Friday’s session at $78.57, down 12 cents (0.2%). The global crude oil benchmark reached $80.56 early on Friday. Brent this week has him down 8.5%.
The oil price crash in the first two days of 2023 is underpinned by renewed warnings of a global recession and fears that China will plunge into a coronavirus crisis similar to the one it experienced three years ago. was.
Friday’s first rise in oil following Thursday’s rally came as a slowdown in US job growth hinted at a further slowdown in the Federal Reserve.
Crude Oil: Price Outlook
Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said WTI was under extreme bearish pressure as it faced rejection from the key resistance zone of $81.50 built around the 50-day exponential moving average. I pointed out that I finished a week in
Further, a break below $72 will lead to a sharp drop to the horizontal support of $70.”
“If this $70 level creates demand, WTI will resume its move up from the 5-week EMA break support of $77 into the resistance zone, followed by the 50-day EMA at 79.50, and the 100-week simple We can extend the rebound towards the moving average of $82.90.”
However, if the bulls fail to defend the $72 and $70 supports, “the next bearish wave will push WTI to the 200-week SMA of $65.50,” warned Dixit.
Natural gas: market settlements and activities
On the natural gas front, prices fell for the third week in a row, with America’s top heating fuel dropping 17% in the week and more than 50% in three weeks.
Henry Hub Gas Futures Benchmark Contact on the New York Mercantile Exchange closed at $3.761 per million British Thermal Units after officially closing Friday’s session at $3.71 per mmBtu. Gas fell 10 cents in February, or 2.6% for the day. This week he was down 76.50 cents, or 17.1%.
The decline came as market participants focused on the unseasonably warm weather expected for this winter beyond the weekly draw in US gas inventories reported by the Energy Information Administration (EIA).
Natural gas: price outlook
Dixit says natural gas could bounce back above $4, but the chances of a sustained rally seem slim so far.
“As long as the price stays above $3.60, it is likely to move higher towards $3.88 followed by the $4.2 gap area,” he said.
“However, if sustainability falls below $3.60, the decline could extend to $3.03.”
Gold: market settlement and activity
New York’s Comex gold futures benchmark contract closed at $1,870.50 an ounce after officially ending Friday’s session at $1,869.70. February gold was up $29.10, or 1.6%.
It rose about 2.4% for the week, marking its sixth increase in seven weeks. Friday’s session high of $1,870.15 was just below Wednesday’s high of $1,871.30. This was the highest level for Comex gold since his June 17th.
Some traders are following more closely than futures, up 2.1% for the week. Spot gold hit an intraday high of $1,869.88 on Friday, also his highest since June 17th.
Gold: price outlook
The gold bulls need to defend the $1,850-$1,830 support area to keep the yellow metal’s momentum going and test the next level at $1,896.
“Spot gold is known to spend weeks distributing and building momentum perceived as indecision. This often happens before the next leg up begins.”
“A significant buy above $1,900 will bring us closer to the much-needed bullish target of $1,940 to $1,970.”
Dixit warns that the uptrend will be invalidated below $1,825.
Disclaimer: Barani Krishnan does not hold positions in the commodities or securities he writes about.