Markets oil OPEC

‘The Worst Is Over’: OPEC+ Deal Lines Up With Record China Oil Imports

" more than ever it is important to adhere to 100% compliance".

China’s crude oil imports hit a record in May at nearly 48 million tons, equivalent to some 11.3 million barrels/day, in what looks like another sign that demand is recovering in the world’s second largest economy.

Last month, reports indicated Chinese oil demand was near pre-virus levels. Through mid-May, demand was down just ~400,000 b/d year-on-year, unnamed executives and traders told Bloomberg. That stoked optimism that oil’s rebound from April’s existential crisis isn’t just attributable to curtailed supply.

“The Chinese are buying everything in sight”, one major trading house said.

Read more: Xi Conjures Astounding Oil Demand Recovery

Fast forward a few weeks and China’s trade data appears to confirm the recovery. “Ship-tracking data show tanker arrivals last month rose to pre-virus levels, as cargoes bought during oil’s crash into the $20s began arriving”, Bloomberg notes, adding that “at least two dozen tankers on China’s east coast were awaiting to discharge earlier this month”.

This comes as OPEC+ extended production curbs this weekend, as expected. The historic cuts will be in place for at least an additional month, while the cartel and its allies will apparently be more vigorous in monitoring compliance going forward.

Iraq was a sticking point, and simple math suggests it will be difficult for the nation to atone for its under-compliance without incurring significant pain on the budget front.

The communique calls on “countries who are unable to attain full conformity (100%) in May and June to accommodate the pending production adjustment in July, August and September 2020, in addition to their already agreed production adjustment for such months”.

Because Iraq fell well short of its curbs last month, making good on its commitments in full would entail cutting production by some 24%, Bloomberg notes, adding the obvious, which is that doing so “could risk a backlash from Iraqi parliamentarians and political parties loath to bow to foreign pressure”.

The deal extension is for a collective 9.6 million barrels/day cut in July. That’s less than the 9.7 million in the original deal, as Mexico (which caused more than a little drama in April) isn’t participating.

The monitoring committee is set to meet monthly going forward, tipping a micromanagerial approach to a market which imploded in March and April, when an ill-conceived price war between Riyadh and Moscow collided with the biggest demand shock in history.

“Pressuring lower compliance participants is unambiguously positive for oil markets”, Axicorp’s Stephen Innes said in a Saturday note. “With more loosening of global lockdown restrictions in the coming weeks, particularly in large US states, this should lead to increased driving activity and support for oil prices”.

“Demand is returning as big oil-consuming economies emerge from pandemic lockdown”, Prince Abdulaziz bin Salman remarked over the weekend, underscoring China’s recovery, which manifested recently in the best Caixin services PMI in a decade and the first positive industrial output print since the onset of the virus. “We are over the worst”, Prince Abdulaziz added.

There was no word on whether the Saudis’ unilateral additional cuts of 1 million barrels per day would be extended. It’s possible the overall curbs will be pushed into August at a meeting later this month.

Oil has, of course, risen for six consecutive weeks, a remarkable recovery following a surreal trip into negative territory for WTI.

If you ask Goldman, the deal extension is already priced in. Prices are now close to levels which may be self-defeating, the bank’s Damien Courvalin says, adding that while big curbs are necessary for inventory normalization, extended commitments are a boon to the cartel’s competition. The bank cites the return of E&P high yield debt issuance.

“This may be a prescient sign of a looming resurgence in US shale activity”, PVM said Friday. “Needless to say, this will keep oil prices on their toes and trading volumes ticking over at a healthy clip”.

The US oil rig count fell again last week, Baker Hughes said Friday. At just 206, drilling rigs targeting crude have fallen by 70% in the past 12 weeks alone to the least since the summer of 2009.

“The hope is that while US producers will seek to maximize returns from existing wells as oil prices move higher, they will exercise a greater level of capital discipline when it comes to plans for new drilling”, Axicorp’s Innes remarked.

That is, indeed, the hope. But at times, US production hasn’t been the model of “discipline”.

Alexander Novak characterized the market as persisting in “a fragile state”. It “needs support”, he added. “That is why today more than ever it is important to adhere to 100% compliance”.


2 comments on “‘The Worst Is Over’: OPEC+ Deal Lines Up With Record China Oil Imports

  1. RStantz says:

    Full month of May China import and export data look pretty grim. Don’t know what China’s internal storage capacity is and how much was utilized but I wonder if they weren’t stockpiling in April and early May.

    • I’m not sure it’s actually as grim as it looks, which is why I didn’t do a post dedicated to it. Volumes for import categories that matter seem to have increased. Almost all of the import drop looks to be attributable either to base effects or plunging commodity prices. That’s why doing entire posts dedicated to China’s trade figures is sometimes a risky proposition if one isn’t prepared to really parse the numbers — it’s easy to say things that may be accidentally misleading. It looks like Reuters may have fallen into that trap on Sunday.

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