Low Expectations. The Energy Report 03/6/2023

China’s oil demand expectations come and then they go. On Friday, oil soared on signs of strong demand but today expectations are being tempered. Oil prices are dipping as China sets an easy-to-reach growth target of just 5%. Oil traders and grain traders took this as a sign that the China covid reopening might not be as gangbuster as some had hoped. But if you look at the surrounding evidence for the Chinese reopening, it’s clear that China most likely is going to aim low so they can exceed expectations.

A clear sign pointing to that fact was the move by Saudi Arabia over the weekend to raise their selling price for oil. Saudi Aramco raised the official selling price (OSP) for Arab light crude for Asia by USD 0.50/bbl m/m to USD 2.50/bbl for April. If Saudi Arabia feels confident enough to raise prices to China, they must feel pretty good about the demand growth expectations. They may also want to drain US and Russia supply but the main reason is they are convinced they can raise prices and maintain market share.

Bloomberg News reported that, “The Paris-based agency raised its estimate of global oil demand growth for this year by 100,000 b/d to 2 million b/d on the back of a “resurgent” China and an aviation recovery, it said in its latest monthly oil market report published Feb. 15. OPEC has also forecast China’s oil consumption to rise 400,000 b/d year on year in the first quarter of 2023 and 800,000 b/d on the year in the second quarter, with ground and air travel seeing strong rebounds after years of strict lockdown measures, it said in its latest monthly market report published Feb. 14. China also may cut its clean oil product exports to as low as 1.5 million mt (385,000 b/d) in March from above 3 million mt in the previous months due to the maintenance season while domestic demand recovers amid reopening coupled with negative export margins, market sources previously told S&P Global Commodity Insights.

China is still a demand driver key. The Biden administration seems to be all over the place when it comes to its China policy. It seems that China has become more of a threat under Biden’s weak leadership. The AP reports that, “The Biden administration is close to tightening rules on some overseas investments by U.S. companies in an effort to limit China’s ability to acquire technologies that could improve its military prowess, according to a U.S. official familiar with the deliberations. The soon-to-be-issued executive order from President Joe Biden will limit American investment in advanced technologies that have national security applications — such as next-generation military capabilities that could help China improve the speed and accuracy of military decision-making, according to the official, who was not authorized to comment and spoke on the condition of anonymity.” Still, according to Bloomberg, the National People’s Congress on Sunday, suggests strong monetary or fiscal help may be off the table for now.

There is good news from the Energy Information Administration as they fix the all-important “Petroleum Status Report”. The growing complexions of the US and global crude market have led to record-breaking and misleading crude oil adjustments giving a false perception of crude oil supply. Reuters reported that, “The U.S. Energy Information Administration said on Friday that crude oil blending and under-reported oil output were key reasons for recently high adjustment figures in the weekly oil inventory data. The EIA will change its surveys to get more accurate crude output data, and also change its accounting methods for crude oil blending, Joe DeCarolis, an official with the EIA, said on Twitter.

The EIA has posted three consecutive weeks of relatively high adjustments to crude inventory data. In the most recent data, the EIA reported an adjustment factor of about 2.27 million barrels per day (bpd), on par with the largest adjustment ever since records began in 2001. The EIA recently completed a 90-day assessment of the high adjustment figures, DeCarolis said. Some reported U.S. crude oil exports include other products, likely natural gasoline and naphthas, which can be blended into crude or reported as crude exports, he added. “That would mean that the amount of actual U.S. crude exports is slightly less than what is reported,” he said.

On top of that, record breaking crude oil exports from the US has changed the dynamic of how they count barrels that are getting ready to be exported. I applaud the EIA for making these changes and despite the recent criticism of their data, they are still the best oil reporting agency in the world.

Reuters reported that last week the EIA said, “The United States exported about 5.63 million bpd of crude, the highest on record, EIA data showed. In comparison, the strongest week for U.S. crude exports from data and analytics firm Kpler was 4.48 million bpd in the week ended Sept. 23. So that difference is playing havoc with the data and could lead to another adjustment. Also, the EIA may have to make a separate category for some blends of crudes. The EIA said that crude oil blending is also contributing to the higher adjustment figures, largely due to field condensate, which is often collected in gas gathering lines or at the inlet to gas processing plants and introduced into the crude oil system as light hydrocarbons, DeCarolis said. Production data on these liquids is not collected in the EIA’s current natural gas or crude oil surveys, and they largely go unaccounted for as they enter the crude oil system, DeCarolis said.

Natural gas took a big step back last night as weather models seemed to warm up.

Time to get hedged on gasoline and diesel. Crack spreads should head back toward records.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

 

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