Oil markets have rallied since OPEC+ announced that it will reduce its output further, by some 1.66 million barrels per day, bringing the cartel’s total output reduction to 3.66 million barrels daily, or 3.7% of global oil demand. To sweeten the deal further for the oil bulls, Russia announced it would extend its 500,000 bpd cut until the end of 2023. The announcement triggered an immediate 8% spike in oil prices that had languished for months amid weak demand and a worsening macro outlook. WTI crude has now gained 22.9% to trade at $82.25/barrel after crashing to a one-year low in March while Brent is up 18.7% to trade at $86.39/barrel.
But worrying signals coming from the pivotal Chinese commodity markets have the potential to derail the oil price rally. Reuters has reported that prices across the steel complex have been falling in recent sessions, with China's falling iron ore imports sending signals that demand might be weakening after a strong start to the year. China is responsible for more than half of the world's steel production and also buys ~70% of global seaborne iron ore.
The spot price for benchmark 62% iron ore for delivery to north China ended at $118.80 a tonne on Monday, the lowest level since Jan. 9. The price has now declined 10.9% ever since it peaked at $133.40 a tonne a month ago. Coking coal prices are also under pressure after dropping to $289.90 a tonne on Monday. Coal is the second key raw material used in steel manufacture. The Singapore-traded contracts have now crashed 23.9% after hitting a 2023 peak of $381 tonne on Feb. 17. Related: Oil Prices Gain 2% As Inflation Data Remains Hot
Oil Price Outlook Remains Bright
But falling prices are just part of the problem here. China’s iron ore imports and steel output have also started losing momentum, again pointing to weakening demand. Refinitiv data shows that China’s iron ore imports average 3.04 million tonnes.a day, down from a daily average of 3.29 million tons for the first two months of the year.
Steel output has also been softening, with steel consultancy MySteel reporting that demand for steel products has dropped 6.7% week-on-week to 4.36 million tonnes.
On a brighter note, the falling demand could be part of Beijing’s plan to lower steel output by 2.5% in 2023 from last year's 1.018 billion tonnes. It’s also possible that these trends are a sign that sky- high optimism is being replaced by a more moderate, but still somewhat positive reality.
Another good sign: energy markets continue attracting the lion’s share of investor dollars.
Last week, only two equity focused exchange traded funds saw positive capital flows with Invesco QQQ Trust 1 (NASDAQ:QQQ) attracting $1.9B in net capital inflows while the Energy SPDR (NYSEARCA:XLE) was second after pulling in $819M. In sharp contrast, equity ETFs as a whole recorded their third week of capital outflows in four after losing $2.6B.
It’s likely that the energy markets will continue to focus on overall fundamentals rather than fretting too much over China’s commodity markets.
Commodity experts at Standard Chartered have reported that a large oil surplus started building in late 2022 and spilled over into the first quarter of the current year. The analysts estimate that current oil inventories are 200 million barrels higher than at the start of 2022 and a good 268 million barrels higher than the June 2022 minimum.
However, they are now optimistic that the build over the past two quarters will be gone by November if OPEC+ cuts are maintained for the whole year. In a slightly less bullish scenario, the same will be achieved by the end of the year if the current cuts are reversed around October.
The oil markets have been oversupplied over the past few months thanks to overall weak demand following warmer than expected weather in Europe. The U.S. crude market started signaling oversupply in November, the first time supply exceeded demand in 2022. The front-month spread, traded in contango in November ahead of the December contract’s expiry. Front-month spread is used to gauge short-term supply-demand balances. Luckily, the rest of the market retained a bullish structure known as backwardation, an indication that the bearishness could yet be a short-term one. Well, the bulls have finally been vindicated with the surplus in U.S. commercial inventories having all but disappeared. After months of providing ominous signals about the global oil market and the health of the U.S. economy, the weekly Energy Information Administration (EIA) report has started sending significantly more positive indicators.
Commodity analysts at Standard Chartered have revealed that their proprietary U.S. oil data bull-bear index climbed a sizzling 29.1 in the latest week to hit an ultra-bullish +98.4. According to the experts, this marks the second-strongest reading on record for the decade-old index and the second consecutive ultra-bullish reading. Inventories fell against the five-year average in all categories apart from jet fuel, with large draws against the average in crude oil (7.08 million barrels of which 3.21 million barrels was at Cushing), gasoline (6.04 million barrels ) and distillates (3.88 million barrels). Gasoline inventories have become particularly tight, currently hovering around an eight-year low for March.
By Alex Kimani for Oilprice.com
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