Western Alliance addresses China's cracks

A punishing week for the bulls with crude oil dropping $8 per barrel during just 5 trading days.

We began the week with tentative softening sounds coming from the G20 meeting in Indonesia…. President Biden and President Xi of China meeting for the first time…. A 3-hour long straight-talking meeting seemed to at least give a minor foundation back to the World albeit for a few short hours. Smiles and handshakes between the two leaders were key and even more so the statement by Joe Biden saying there will be no more Cold War between America and China and they will explore ways to find common ground (just don’t mention Taiwan!). Anthony Blinken U.S. Secretary of State will follow up during the next months to develop the relationship further.

Clearly this “cozy up” will rattle Russia but what seems to be becoming clearer in the fog of Global uncertainty is that China is winkling out partners who will support their economy and ones that can be relied upon to trade fairly without the risk of them going to war based upon a country’s ego and need for power. 

China is already starting to mop up some of Russia’s customer base in Central Asia as Khazakstan, Tajikistan and Kyrgyzstan start to ease away from Russian influence. In a significant move, Mr Xi also echoed the Treaty on the Prohibition of Nuclear Weapons by calling on the world to “jointly oppose the use of or threats to use nuclear weapons”. The meetings with President Xi seemed supportive to the west (but more especially China’s economic future !) at least in terms of keeping trade opportunities alive, the old adage “Xi knows which side his bread is buttered on” seemed appropriate. As a result, the oil markets released some tensions, but they weren’t the only reasons for the fall in prices.

As December the 5th approaches and the banning of Russian crude oil imports into Europe with it, market participants are suggesting that Europe’s newfound ability to source crude oil from Latin America, the Middle East, and the United States is the main cause for European refiners breathing a sigh of relief when it comes to ensuring the continuous running of refineries and crude supply. In a twist of fate Asia, too seems satiated with more crude oil than analysts were predicting, thanks to China’s battle to obtain the elusive zero-covid goal and consequent lower imports.

Interestingly Europe’s imports of Latin American crude have averaged 313,000 BPD so far this year, up from 132,000 BPD earlier in the year according to Refinitiv Eikon data, although in July, the average was well above that, at 600,000 BPD, so it does vary but the trend is clear.

To add to the mix, Europe has taken 1.1 million BPD on average from the USA this year, compared with just 800,000 BPD last year. Europe’s Iraqi oil imports are 20% higher from July-November compared to the same period last year.

Certainly, these statistics suggest supply will not be as curtailed as everyone expected for the balance of 2022, the beginning of 2023 but it’s early days to “count your chickens before they are hatched”. However, on the face of it, it seems Europe could be overbought crude for at least the near term rather than being in a panic at the loss of the Urals supply. In addition to these fears causing panic purchases, weeks-long strikes at French refineries and a rash of refinery maintenance also curbed refining crude oil in Europe as runs slowed meaning crude stocks have had time to build.

Three sentences of warning to consider spring to mind if any of us are thinking crude oil prices will collapse further: Firstly the war rages on with Putin‘s concentration centred more on destroying basic Ukrainian infrastructure...we can only guess what happens afterwards

Secondly, Nato Secretary Jens Stoltenberg has declared the pipeline fractures in the Nordstream 1 and 2 pipelines were caused by explosives and if proven this was carried out by Russia it would be an “act of war against NATO”.

Thirdly, the next OPEC+ meeting will take place on December 4th, which may be the most exciting meeting in years!

In other news……The G7 has yet to come up with its maximum price allowed under the Russian oil price cap, but they remain set to enforce it. “Our sanctions will cover crude for EU member states so we will not buy Russian crude oil starting from December 5 and we covered the possible oil price gap for international buyers with our eighth package of sanctions,” EU energy commissioner Kadri Simson said, adding that the overall framework was in place. It’s still not clear how this works!

New shipping insurance rules for global shipping will kick in on December 1st. Turkey has announced that any cargoes transiting the Bosphorus and Dardanelles straits must prove their insurance status. This may well cause Russia some issues for Black sea origin cargoes should the G7 price cap oil cargoes and prevent the issuance of insurance unless that price is used. Turkey’s logic is to protect its waters from pollution and contamination, but there is more to it than that!

It’s been a disaster of a week for the bulls, thin volumes and ever-increasing margin calls are mainly to blame and those two elements along with a strong dollar and yet more FED threats to increase interest rates are aligning with Europe having enough crude supply and China and Asian demand lower for now.

For now, markets are on the ropes with little room for a comeback…… until….