Oil prices have rebounded since late December on signs that OPEC production cuts are working.
That’s the conventional wisdom. But what exactly are those signs? And could it be traders are overlooking evidence pointing the other way?
The argument for stronger fundamentals is based partly on US crude inventories.
US stocks have increased, which is typical for this time of year because refineries take units offline for scheduled maintenance.
But the size of the builds have been relatively small.
Over the first nine weeks, inventories have grown by 11.5 million barrels, roughly one-third the five-year average (2014-18), according to Energy Information Administration data.
But here’s the problem: How can you say the global supply-demand balance has tightened by looking exclusively at US inventory data?
OPEC producers could divert some exports away from the US giving the appearance of tighter supplies.
Source: ICE via MarketView
What about the rest of the world? At the top of list by importance sits China.
Ursa measures Chinese crude inventories weekly using synthetic aperture radar (SAR), providing traders and analysts with a timelier and more reliable dataset than government statistics.
Image Credit: Christina Wessel/Ursa
Chinese stocks began increasing in late 2018, according to Ursa data.
The rise was attributed to opportunistic buying as crude prices sank. Independent refiners were also fulfilling 2018 import quotas.
In addition, sluggish gasoline sales pulled refining margins causing refinery activity to slow, contributing to inventory builds.
We found that implied refinery runs fell in October and again in November. Ursa partners with ClipperData to calculate Chinese refinery demand using inventory changes and shipping flows.
This set the stage for 2019. Would Chinese refiners burn through inventories? So far this year, the answer has been “no.”
The same trend has been visible in Shandong Province, home to China’s independent refiners, leading to speculation that they will scale back imports in March and April.
What does this mean for oil markets?
If Chinese demand hits a soft patch, this should be reflected in oil prices, specifically Dubai crude, which serves as benchmark for Middle East supply headed to Asia.
Here’s where things get interesting. Dubai crude has been red-hot of late, trading above Brent for the first time since 2015.
Source: NYMEX via Marketview
It’s the exact opposite result you might expect were it not for other factors.
The impetus for Dubai strength has come from the supply-side. US sanctions on Venezuelan state-run oil company PDVSA imposed at the end of January exacerbated supply concerns regarding medium to heavy sour crude.
Prices for Dubai crude, along with other medium to heavy sour grades, have risen sharply relative to sweet grades, such as Brent.
A key question is whether the supply story -- OPEC production cuts, US sanctions on Venezuela and Iran -- has masked weakness on the demand side.
What do you think?