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China woes shrugged
Wobbly Chinese property developer near default raised fear of demand loss
Steve Sutherlin Petroleum News
Alaska North Slope crude jumped $1.45 to close at $75.67 per barrel Sept. 22, as rising oil demand and falling U.S. oil stocks stoked a bounce-back from a Monday sell off Sept. 20. West Texas Intermediate bounced $1.67 Sept. 22 to close at $72.23, and Brent cranked higher by $1.83 to close at $76.19.
Sept. 20 was a risk-off day in financial markets on fears that a major Chinese real estate developer might default on its loans and set off a chain reaction of economic contraction which would cool oil demand.
ANS dropped by $1.38 Sept. 20 to close at $73.86, while WTI shed $1.68 to close at $70.29, and Brent lost $1.42 to close at $73.92.
Prices dropped on the last trading day of the previous week, as Russia made plans to increase production, and a stronger dollar sapped the purchasing power of foreign currencies for dollar-denominated assets such as oil. ANS fell 54 cents Sept. 17 and Brent fell 33 cents, but both indexes remained in the upper $70s, closing at $75.23 and $75.34 respectively. WTI lost 64 cents to close at $71.97.
Despite Friday’s losses, oil prices ended the week higher. A dramatic rally on Sept. 15 took ANS and Brent above $75. West Texas Intermediate rose 3.1%, or $2.15, to close at $72.61 per barrel, ANS rose $1.77 to close at $75.59 and Brent rose $1.86 to close at $75.46, as prices clawed their way back from August doldrums which had erased 5.9% from ANS prices.
Despite a week of price volatility, the ANS Sept. 22 closing price of $65.67 was just 8 cents higher than the Sept. 15 price.
Drawdown on US crude stocks Although fears of financial wobbles in China rattled oil markets, the hard numbers show oil demand is on the rise to recovery.
U.S. crude inventories for the week ending Sept. 17 fell by 3.5 million barrels to 414 million barrels, the lowest level since October 2018, according to U.S. Energy Information Administration figures released Sept. 22. The reduction came on the heels of a 6.4 million barrel drawdown the previous week.
U.S. crude oil inventories are about 8% below the five-year average for this time of year, the EIA said. Total motor gasoline inventories increased by 3.5 million barrels but remain about 3% below the five-year average for this time of year.
Total products supplied over the last four-week period averaged 21.0 million barrels a day, up by 17.9% from the same period last year, the EIA said.
“Over the past four weeks, motor gasoline product supplied averaged 9.2 million barrels a day, up by 8.2% from the same period last year,” the EIA said. “Jet fuel product supplied was up 70.4% compared with the same four-week period last year.”
Based on total products supplied, demand for fuel in the United States has recovered to 2019 levels.
An uptrend in natural gas prices has supported oil, with gas shortages in Europe and Asia driving demand for fuel oil.
In remarks to the Gastech conference in Dubai Sept. 21, OPEC Secretary-General Mohammad Sanusi Barkindo said more oil and gas will be needed to fuel the future.
“The world will continue to consume energy, as by 2045 the demand on oil is expected to grow by 28% and on gas by 26%,” Barkindo said. “The world needs continuous, predictable, and adequate investments in energy, particularly in oil and gas, which is irreplaceable because of the scale of its contribution to the global energy mix.”
Barkindo said the global economy is expected to double by 2045 and the population will increase by 20%.
“This will require the investment community to invest in supporting the energy sector as there is no other resources available to cover more than 50% of what the market needs,” Barkindo said.
Chinese developer staves off default Chinese property developer China Evergrande Group shook stock markets in Asia, Europe, and the United States Sept. 20 as it struggled with obligations of more than $300 billion to creditors and other businesses.
Evergrande’s wobbles led to worries over the broader health of China’s real estate sector, which triggered a wider sell-off that sent the Hang Seng Property index, which tracks a dozen listed developers, down 7% to its lowest point since 2016, according to a Sept. 20 Financial Times report.
Analysts were concerned that booming property values in China were at risk, and if home prices fall, Chinese consumers might pare back consumption as the wealth effect of home equity is diminished.
In addition to oil, metal prices fell on Sept. 20 as well.
While comparisons were made to the fall of U.S. investment bank Lehman Brothers in 2008, analysts say Evergrande’s problems are unlikely to cause similar systematic damage because it holds land rather than financial assets as Lehman did.
Fears of imminent contagion from Evergrande were temporarily soothed Sept. 22 when the company agreed to settle interest payments on a domestic bond on Wednesday, as the Chinese central bank injected cash into the banking system.
Oil prices, commodities and equities are recovering, as the risks of the Evergrande situation become better defined.
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