Daily Energy Report

Chinese oil imports are sensitive to prices, Saudi Arabia and Russia deliver July’s cut, Mexico export problems, Australia’s “green” obsession, ESG nonsense, new US nuclear reactor, and more

Chart of the Day: China’s oil imports are price-sensitive.

Summary

Figure (1) above shows trends in China’s oil imports and Brent oil prices since the beginning of 2022. It clearly shows the inverse relationship between oil and import prices (with lags of 8 weeks).

EOA’s Main Takeaway

China imports more at low prices and imports less at high prices. Although the inverse relationship between prices and imports is clear, the Russian oil price discounts distorted this picture. The inverse relationship would have been stronger without the Russian discount. 

When prices are high and China imports less, how do the Chinese meet domestic demand? When China imports additional amounts at lower prices, it stores the oil. When prices increase, it releases oil from storage. This was the topic of our weekly newsletter: Busting Myths about China’s Oil Demand and Imports

Story of the Day

Bloomberg: OPEC Output Plunges by Most Since 2020 as Saudis Deepen Cuts

Summary

OPEC crude production dropped by 900,000 barrels a day last month to an average of 27.79 million a day, the most significant decline since 2020 during the Covid pandemic. This decrease resulted from Saudi Arabia's deeper cutbacks to bolster global markets. Riyadh delivered most of the additional 1 million barrel-a-day cut it pledged to buoy prices amidst weak economic data from China and US recession fears. As a result, oil prices have recovered, reaching a three-month high above $85 a barrel in London. Despite concerns from consumer nations that OPEC's policy could reignite inflation, key members seem to need higher oil prices to cover government spending. It is expected that Saudi Arabia will extend its measure into September to address a supply shortfall in the market. Russia, a member of the wider alliance known as OPEC+, has also started reducing supplies after months of non-compliance, helping support the market.

EOA’s Main Takeaway

Saudis delivered the voluntary cut they promised and oil prices rose to about $85/b.  This shows that Saudi Arabia remains the main player in the global oil market despite the existence of the 23-member OPEC+.  A few questions are in order: Will Saudi Arabia extend the cut to September? If they do, will the cut be 1 mb/d or lower? If they cut, will OPEC adjust its optimistic forecasts of global oil demand growth? As of now, there is a large cap between the call on OPEC and OPEC production.

The Saudi decision regarding extending the cuts depends on orders that Aramco receives.  If there is no strong additional demand, then Saudi will cut accordingly.  In other words, if Saudi Arabia decides not to extend the cut or to cut, let us say, only 700,000 b/d in September, that is bullish because it indicates they see additional demand. They will not meet all the demand to maintain a tight market. 

Figure (2) shows OPEC crude oil production. The dotted line is our forecast from May.

News of the Day

Bloomberg: Mexico’s Largest Oil-Export Terminal Shut as Summer Demand Jumps

Summary

Petroleos Mexicanos, the state-owned Mexican petroleum company, has closed the country's largest oil-exporting terminal, FPSO, in the Gulf of Mexico, due to a crude leak. This incident follows another closure last month at its Salina Cruz terminal due to an accident caused by strong winds and an explosion on a company gas platform that resulted in two fatalities. These shutdowns occur at a time when Petroleos Mexicanos usually increases oil sales to the US for the summer driving season. Operations at the FPSO and Salina Cruz terminals are expected to restart later this week, helping Pemex address a backlog of seven ships waiting to load 8 million barrels of oil for customers in the US, South Korea, China, and India.

EOA’s Main Takeaway