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Macroeconomic jitters are governing oil markets in spite of robust micro fundamentals. Low OPEC production and increasingly limited upside risk to US production will continue to keep crude supplies tight, while crude stocks continue to fall worldwide, refining margins are healthy and all crude benchmarks are now backwardated to varying degrees. The US–China trade war has driven flat price close to its Q4 18 levels, but the physical market couldn’t look more different.
The market’s new fear is that the trade war could spawn a currency clash that results in China exporting deflation to the whole world. Fear of such an escalation is partly predicated on a slowly dawning realisation that in the short term there is simply no grand bargain to be had between the two sides. For Beijing, any lasting deal must see US tariffs removed, but it refuses to compromise on core areas to achieve that. Indeed, developments so far this summer show China is willing to take the pain now and is taking a much longer view than the Trump administration.
To us, the increased downside pressure on flat price is all about the lack of confidence around demand in H2 19 and 2020 demand (as well as technical factors triggered by producer hedging). Should demand stabilise, the set-up is there for a sharp rally based on tight stocks and supplies.
Exports from Iran remain far lower than expectations, falling to just 0.40 mb/d in July and only 50% of that actually arriving in other countries (floating storage is now above 54 mb). Saudi Arabia remains committed to supporting prices and is thus continuing to overcomply with the OPEC deal. And while the US ‘embargo’ on Venezuela does little to deter Chinese, Indian and Russian buyers (it is aimed entirely at protecting Citgo), Venezuelan exports remain low.
|Fig 1: US, ARA, Japan crude stocks & prices||Fig 2: Global supply outages, mb/d|
|Source:EIA, PAJ, Bloomberg, Energy Aspects||Source:Energy Aspects|