This week's Global Market Analysis takes a look at the impact various lockdowns across China have had on oil demand, as well as heightening oil volatility for Far East propane cargoes and US gasoline pricing finding a bottom.
Impact of Chinese lockdowns quantified
By Chen Ee Woon
Back in April, the Chinese government announced a series of lockdown measures designed to manage the growing number of Covid-19 cases in its cities. Shanghai was among the cities locked down which was significant both symbolically and economically due to its status as a so-called “Tier 1” city.
It was then abundantly clear that oil demand would take a hit due to the reduced need to travel and consume. General Index reported this back in April, citing traders’ comments and spot trade data to demonstrate the reduced level of Chinese spot purchases.
However, it was not until June when the market was able to confidently place a number on the decline on Chinese imports. The impact was larger than expected.
Source: National Bureau of Statistics, China. Light blue bands represent the min-max quantity taken over the last five years.
Crude import data immediately catches the eye. Crude volumes imported dipped sharply in June, coming precariously close to the five-year minimum crude import volume.
Other data paint a more positive picture. Run rates held up at normal levels, contrary to expectations. This suggests that run rates could dip in the future to compensate for reduced demand for refined products.
Chinese crude production climbed sharply this year. However, as China is not a major producer, this datapoint is less important in general.
Overall, the dynamics described above led to a negative implied crude stock change in June which is the first time this occurred in 2022. Previously, crude stocks have always been on the rise due to widespread restocking after drawdowns in the second half of 2021.
In that sense, Vitol’s Head of Asia Mike Muller was right on the money when he said this in February:
“I think it’s fair to state that China is at bare minimum… all eyes are on what happens in China after the Chinese New Year. There’s a feeling that some restocking will be required.”
Looking ahead, it will be interesting to see how Chinese data continues to evolve. We see import data rebounding in August. This is because in terms of spot market activity, Chinese buying appears normal right now. This is unlike April where we sensed a lack of buying interest from Chinese companies.
In terms of pricing, Dubai M1M3 performed very strongly this month, trading close to the US$10.00/b mark most of the time, demonstrating demand from Asian (Chinese) customers. However, beyond September, data would depend heavily on the state of Chinese lockdowns again.
Current figures are not optimistic. An uptick in cases is testing the government’s appetite for another widespread lockdown.
Granted, cases are not concentrated in “Tier one” cities like Shanghai right now, but the overarching theme is clear. If China continues to adopt a super strict Covid-19 policy its crude demands will be hampered.
The data seen this time will also provide a good reference to estimate the impacts of any future lockdowns. Crude time spreads have remained strong despite the reduced purchases from China.
It remains to be seen if the approach adopted will change come October when President Xi takes over his next five-year term. Until then, “social stability” will be the name of the game.
Choppy Far East Propane cargoes in July amid heightened oil volatility
By Zulfadhli Kader
Global oil prices crashed last week amid a period of renewed volatility for markets, resulting in choppy trading for LPG markets East of Suez.
In the first week of July, there was limited LPG trading activity during the pricing window. Since most of the first half August arrivals had already been filled, the week was expected to be noticeably quiet. Values were a little more challenging to evaluate due to volatile petroleum prices as sentiments ebbed and flowed. Ultimately, only one deal was done in the first week of July, a 23,000 MT cargo for first half August delivery at August FEI minus US$3/MT.
Petchem interest in LPG as a feedstock is dwindling due to poor margins. Ethylene/Mopj spread fell to about $100/t. Many importers, even on the PDH side, are currently hesitating as economic conditions worsen.
The Saudi July CP announced at the start of the month was set at US$725/MT for both propane and butane -- the lowest CP for Butane in 2022. The world’s butane supplies look to be more than sufficient to meet current demand, especially with additional cargoes emerging from the Middle East, where there appears to have been a shift back towards propane exports and a reduction in butane exports. In the second week of July, products took a tumble following the crash of crude oil prices. FEI, MOPJ, Mont Belvieu and August CP prices were on a downward trajectory for the entire week. General Index FE CFR Propane fell from US$739.5/MT on 12 July to US$702.25/MT by 15 July. No trades were reported in this window.
In the third week of July, more activity has been seen in the physical trading window. On 19 July, a deal was reported between Vitol and Chevron for a 23,000 MT cargo for second half August delivery at FEI August plus US$1/MT (eq. to US$723/MT). That set the tone for the week. General Index observed buying and selling interest during the daily pricing window on 20 July, although this did not result in a transaction. General Index assessed FE CFR Propane at US$720/MT in midweek, rebounding from the previous week.
Reports are that there are a few purchasers of petrochemicals with tenders, a market with buyers paying a modest premium over August FEI and sellers receiving a slight discount. Volatility is expected to continue as crude oil prices fluctuate.
WTI futures had fallen below the psychological $100/b mark on Tuesday, 12 July 2022, having earlier that day rallied to nearly $111/b, and bottomed out at below $93/b by Thursday's settlement. The benchmark added almost $8/b by the start of this week, but has subsequently fallen back again and were trading around $96-97/b during Singapore trading on 22 July. Inflation, of course, is the worry on everyone’s mind since it inevitably could precipitate a recession. Mounting analyst opinion believes several of the world's most developed economies will experience negative growth well before 2022 is over, potentially bringing the 2022 US economy down with them. Many also predict that demand for crude oil will start to decline. The latest EIA statistics showed a crude build of less than 1mn bl, which was probably below average by a lot of people’s standards.
Gasoline Pricing Finds a Bottom in US
By Jeffrey Bair
The free fall in US gasoline value appears to be leveling out.The cash price for market-dominant CBOB blendstock on the Colonial Pipeline into New York Harbor has been hovering about $3 per gallon all week, according to General Index. The cash value represents pricing several steps ahead of retail in the supply chain.
CBOB represents about four out of every five barrels shipped on the largest US products pipeline. From June through Wednesday, the price fell at more than 2 cents/gal per day.
Also keeping the price level has been low volumes of trade in CBOB. Traders of the blendstock already have acquired their supply for peak summer travel and are preparing for RVP transitions to fall gasoline that begin in about three weeks.
Gasoline typically falls ahead of the change to the fall specifications, representing fuel that is cheaper to make.
There are signs the gasoline market is getting back to normal. US stockpiles of CBOB were at about 103 million barrels through July in federal government data, roughly about the same level they were in July 2019, the last non-pandemic year.