Diesel demand expectations versus historically tight supplies have the whole market cracking up. Reuters is reporting that China’s distillate demand might not be all it’s cracked up to be even as global inventories fall.
Oil prices may be sputtering on Chinese economic slowdown concerns, but the diesel crack spread is not buying it. Even Reuters reports that “China’s muted economic growth in 2023 as its post-COVID recovery underwhelms has crimped the outlook for demand for diesel fuel. The diesel crack spread is within a dollar from the high for the year and is within a heartbeat away from an all-time high. Even as the market frets about Chinese ‘Lehman Moment’ supplies of diesel are still well below the 10-year averages.
The near-record diesel crack spread is a cry for help to refiners to please keep refining at near-record processing rates for diesel to avoid a global shortage and to ignore the growing Chinese economic concerns. Even the bear camps are changing their forecast and now are admitting that the globe is going into a crude oil supply deficit. Yet some still try to downplay it even as they previously predicted it would not happen.
The bear camp is now not pinning their hopes on a US recession anymore but now betting on a collapse of the Chinese economy that despite predictions of weaker demand, is still sucking down a lot of oil and diesel. Reuters pointed out that, “Rystad Energy lowered its forecast for China’s diesel demand for July to December this year to 3.81 million barrels per day (bpd) from an earlier outlook of 3.9 million bpd, though the new forecast is up 3.8% from the first half of 2023.” They also pointed to a prediction from The International Energy Agency (IEA) that expects China’s gasoil consumption in the second half of the year to fall by 150,000 bpd from second quarter levels in its August oil market report.
John Kemp of Reuters wrote that “Commercial inventories of crude oil and refined products in the OECD advanced economies were around 2,821 million barrels at the end of June, according to the U.S. Energy Information Administration (EIA). Commercial inventories were just -45 million barrels (-2% or -0.25 standard deviations) below the prior 10-year seasonal average. Since then, additional production cuts announced by Saudi Arabia will remove an extra 90 million barrels from the market between July and September. Russia has also announced extra cuts amounting to 25 million barrels in August and September, assuming they are implemented in full.
So, will China’s economy be the great equalizer that will ward off an oil price spike? The Wall Street Journal says that “Investors Fear China’s ‘Lehman Moment’ Is Looming”. The Journal wrote that “Zhongrong International Trust, a seller of esoteric financial products that had the equivalent of $108 billion in assets under management at the end of 2022, has become the market’s latest worry. Four trust products managed by the firm recently missed interest and principal payments totaling the equivalent of $14 million to three publicly listed Chinese companies, according to stock-exchange filings. Beijing-headquartered Zhongrong has provided financing to many real-estate developers and helped to fund their building projects.
Market Watch reported that “China Evergrande Group’s EGRNF, bankruptcy filing in New York on Thursday shows a need for Beijing to go big, and soon, to sop up the nation’s soured real estate market, says Clocktower Group’s Marko Papic. China’s second-largest property developer asked a Manhattan court on Thursday for protection from creditors under Chapter 15 of the U.S. bankruptcy code, a way for foreign companies undergoing a restructuring to be shielded from creditors in the U.S. It’s the latest development in a long and drawn-out saga over the debt-laden developer, which recently had about $340 billion in liabilities.
Another Chinese developer, Country Garden Group, has been in the spotlight in recent days after it missed $22.5 million of dollar-denominated debt payments. China Evergrande’s Tianji Holdings affiliate also sought Chapter 15 in New York on Thursday, according to court documents. “The bigger issue is that China’s policymakers are holding out hope that confidence can return China's move back towards communism and away from more capitalistic principles are not working so well for them. The AP reported that Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are “increasingly in trouble” because of their materialism and “spiritual poverty.”
The Wall Street Journal reported that “the unemployment rate for China’s youth reached an all-time record of 21.3% in June. China’s National Bureau of Statistics responded by ceasing publication of the rate. The move calls attention to the lengths to which Beijing will go to suppress unflattering information, in this case, the economic distress facing China’s young people. Yet burying the data doesn’t fix the problem; it doesn’t even hide it. Rather, it reveals something endemic to autocratic societies: an inability, or unwillingness, to produce genuinely accurate and unbiased statistics.”
So, oil and products must decide what to worry about. Do they worry about a global oil and diesel shortfall or a collapse in the economy? If you are a hedger, it's best to worry about a price spike because if the Chinese fears level out and the focus switches back to the supply side, or lack thereof if could get ugly very quickly.
And there are growing concerns that the weather in the Atlantic could get ugly very quickly as well. We have had a relatively quiet hurricane season so far but now we’re getting into the high point of the season and the tropical storm map from the National Hurricane Center is again looking like somebody spilled some coffee on it. There are at least four tropical waves to keep an eye on with at least two of them with a pretty good chance to get into the Gulf of Mexico and disrupt oil and gas operations. While it’s too early to tell where these storms are going to end up or how strong they’re going to be, it’s very important that you stay tuned to Fox Weather to keep up on the latest developments.
Fox Weather reported that “The National Hurricane Center (NHC) is monitoring four areas in the Atlantic that have the potential for tropical development. The closest disturbance to the U.S. is located in the southwest Atlantic. The wave is expected to increase rain chances in South Florida over the weekend before entering the Gulf of Mexico next week. According to the NHC, the disturbance has a low chance of development – near 0% within two days and 30% within a week. Specific impacts on the U.S. will become clearer in the days ahead.
A second feature is located about 500 miles away from the Lesser Antilles. Due to shear and dry air, forecasters have given the disturbance the lowest chances of development out of all the tropical entities.
Furthest east, the NHC is monitoring two investments with a medium and high chance of development over the next week. An investment is a designation the NHC uses to identify an area of disturbed weather being investigated for possible tropical development. The first investment is 99L and was producing disorganized showers and storms over 1,000 miles west-southwest of the Cabo Verde Islands. The area has a 40% chance of development over the next two days and a 50% chance over the next week.
Another potential is located in the eastern Atlantic and is known as 98L. The NHC said further development of this low is possible while it moves toward the west-northwest at about 10 mph. A tropical depression could form over the weekend before environmental conditions become unfavorable for development early next week. The disturbance has a 50% chance of development during the next two days and a 70% chance during the next week.
On the Pacific side, Fox Weather is reporting that Hurricane Hilary rapidly intensified into a Category 4 cyclone on Friday, and forecasters said that the hurricane’s path means the storm could bring “significant” impacts to Southern California and the Southwest by the weekend and into the first part of next week.
Bloomberg News reports that “Europe Gas Storage Is 90% full. But warns it still may not be enough. While fuel stockpiles are at the highest on record for the time of year, they are warning that supply and weather risks could tighten the market ahead of winter. Bloomberg writes, “The continent’s storage levels hit 90.1% capacity on Aug. 16, according to the latest data from industry group Gas Infrastructure Europe. That’s the highest on record for the time of year, and well ahead of the European Union’s Nov. 1 goal of reaching that marker. However, inventories weren’t meant to provide all the region’s winter gas supplies, and a storm of risks is brewing.
Potential worker strikes in Australia threaten to tighten the global market for liquefied natural gas. Europe is still coping with lower flows from Russia amid the war in Ukraine. And prolonged outages in Norway recently have led to price spikes, a reminder of the market’s fragility.