China woes hit ANS

Fear of China demand destruction trumps Middle East war premium

Steve Sutherlin

Petroleum News

Alaska North Slope crude -- in its fourth consecutive daily loss -- dropped $1.11 Aug. 21 to close at $77.00 per barrel. West Texas Intermediate plunged $2.11 to close at $71.93 and Brent dropped $1.15 to close at $76.05.

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The four-day slide was set in motion on demand worries highlighted by data from China indicating a slump hitting key sectors of its economy including industrial production and real estate.

Crude futures were up Aug. 21 in early trading on a huge drawdown of U.S. commercial inventories, but a downward revision in U.S. non-farm payrolls killed the rally, stoking fears of domestic demand destruction and taking prices to lows not seen since January. China is the world's largest oil importer.

China's crude oil processing figures added a bearish note with processing in July slipping 6% year-on-year, Commerzbank analysts wrote, per an Aug 16 Barron's report.

When crude demand is high in China, Asian competition for Pacific tanker cargoes can pull prices higher on the West Coast where ANS finds its primary market, commonly taking ANS to a significant premium above Brent.

When Asian demand is lower, ANS and Brent track more closely, reflecting the price of imported oil needed to bridge the gap between West Coast demand and combined production from the North Slope and California. Indeed, on Aug 21 ANS sported a premium of just 95 cents over Brent.

Further, refinery margins globally were pressured over most of August, raising fears that demand weakness is in play beyond China, ING analysts said in a note, Barron's reported Aug. 21.

Plunging crude prices have dealt a weak hand to the Organization of the Petroleum Exporting Countries and its allied producing nations including Russia, which may scuttle the group's plans to begin unwinding supply cuts in October, ING said.

OPEC and the International Energy Agency have adjusted their forecasts for global oil demand slightly downwards, Commerzbank analysts said.

The Middle East war premium that recently counteracted demand worries has subsided in recent days as crude traders have repriced risks in the absence of a retaliatory strike by Iran on Israel.

On the Israel/Hamas front, Israel has agreed to a U.S. proposal to bridge negotiating gaps which hindered a ceasefire agreement in Gaza between itself and Hamas, lowering regional tensions, Barron's said.

Bullish drawdown of US inventories

Analysts surveyed by The Wall Street Journal called for crude stockpiles to fall by 1.5 million barrels.

Total motor gasoline inventories fell 1.6 million barrels for the period to 220.6 million barrels -- 3% below the five-year average for the time of year, the EIA said. Distillate fuel inventories decreased by 3.3 million barrels to 122.8 million barrels -- 10% below the five-year average for the time of year.

ANS fell 95 cents Aug. 20 to close at $78.11, while WTI fell 33 cents to close at $74.04 and Brent fell 46 cents to close at $77.20.

ANS took a tumble out of the $80s Aug. 19, plunging $1.89 to close at $79.06. WTI plummeted $2.28 on the day to $74.37 and Brent plummeted $2.02 to close at $77.66.

On Aug. 16, ANS slid 60 cents to close at $80.95, WTI slid 75 cents to close at $76.65 and Brent dropped $1.29 to close at $79.68.

ANS edged up by 12 cents Aug. 15 to close at $81.55, as WTI added 42 cents to close at $77.40 and Brent jumped $1.21 to close at $80.97.

From Wednesday to Wednesday, ANS dropped $4.43 from its close of $81.43 Aug. 14, to $77.00 on Aug. 21. ANS traded at a $5.07 premium over WTI on Aug. 21.

Pace of China growth to slow

Economic output per person in China has increased by some 3000% in recent decades, according to the World Economic Forum. But economic growth in China has slowed in recent years.

Growth is projected to decelerate to 3.3% by 2029 due to aging and slower productivity growth, according to the International Monetary Fund.

"China's economic growth is projected to remain resilient at 5% in 2024 and slow to 4.5% in 2025," the IMF said in a May 2024 note, adding, "Risks are tilted to the downside, including a greater- or longer-than-expected property sector adjustment and increasing fragmentation pressures."

"Even a so-called slowed down growth of China is actually incredibly relevant for the global economy," noted Aparna Bharadwaj, Managing Director and Partner at Boston Consulting Group.

Experts maintain that new avenues of growth will be required for China to retain steady growth. This includes expansion in new and transforming industries like artificial intelligence, digital financial services and green technologies like electric vehicles, the WEF said.

In 2017, Chinese President Xi Jinping said China would transition its economy away from a period of high-speed growth to a stage of high-quality growth.

"Analysts note that despite China's positive economic outlook for 2024, obstacles and hindrance to growth do persist," the WEF said. "Notably, this includes geopolitical tensions and global economic fragmentation."

Last year, the IMF estimated that economic fragmentation and increased international trade restrictions could cost the global economy $7.4 trillion and cut global economic output by as much as 7%.

"Experts note that in particular, tensions between the United States and China pose a significant threat to economic development worldwide -- especially for developing economies," the WEF said.

"Business leaders in the Global South would like to do business across geopolitical boundaries," Bharadwaj said, adding that restricting economic access to large economies can significantly hinder economic opportunities.