-US data looks to show another draw, but don’t get too excited
-The Shiites are backed into a corner.
Some dip-buying was in play early Wednesday, after contagion set in to shave some 5.3% off the price of Brent and 6.2% from West Texas Intermediate. Worries about an off-kilter market have turned to reality, particularly in China, where storage levels remain bloated. In the United States, the pivotal PADD 3 region on the Gulf Coast is still recovering from Hurricane Laura, though inventories look to post a slight drain. While much of the story on Laura was on refineries, production will almost certainly be stifled by the low price of oil, which can be the solution to lower oil prices. Elsewhere, the geopolitical poles in the Mediterranean and Middle East continue to shift in unsettling ways.
The price for Brent crude oil, the global benchmark for the price of oil, is defending $40 per barrel in early-morning trading. A market saturated with OPEC+ oil and hampered by lackluster demand left Brent closing below the psychological level of $40 in the previous session. Dip-buying put wind in the sales of commodities early Wednesday, pushing Brent up 1.1% to $40.21 per barrel as of 8 a.m. ET.
Writing in Business Standard, Paul Hickin, the associate director at S&P Global Platts, notes that Chinese demand signals were false positives, given the propensity for the world’s second-biggest economy to gobble up cheap crude oil. The GERM Report noted Tuesday that independent refiners in China, known as teapots, were at or near their quotas, which will dampen Chinese demand systemically. Hickin confirms this by noting that inventories are bloated and it’s getting crowded offshore.
“Shandong – home to a host of independent refineries – is completely congested,” he wrote. “The volume of crude stored on tankers idled in Chinese waters near the port city for over a week has quintupled from normal levels.”
Crude oil imports for China, he adds, look to be down a quarter from August levels already.
In the United States, we may have to wait a week to see how products supplied to the market, a proxy for demand, panned out during the long holiday weekend marking the unofficial end to the summer driving season. The Labor Day holiday is usually a high point for demand for retail fuels, though the pandemic may have stifled travel plans considerably. Federal data on commercial crude oil and gasoline inventories are delayed by the US holiday, though Platts expects to see a 500,000 draw on commercial crude oil inventories and a 2.5 million drain on gasoline. Distillates, including diesel, remain bloated, though the crude oil and gasoline levels should help Brent defend $40 per barrel for the time being. Meanwhile, prices are low enough to stifle shale, which could ease some of the supply-side pressures. That said, data from the EIA this week will remain skewed by the lingering impact of Hurricane Laura so don’t get too excited by the draw.
To validate that sentiment, the 37-member Organization for Economic Cooperation and Development finds unemployment rates among its members fell from June to July, but are still 2.5% above pre-pandemic levels from February. And it’s a mixed back across the members. European jobless rates increased for four straight months, though Japan is notching a relatively healthy 2.9% unemployment rate. North America, meanwhile, has shown unemployment rates above 10%, and still some 5% above February levels. As with Chinese oil data, market players may be looking for silver linings that simply aren’t there in the darkened skies of the Western economies.
On the international stage, US President Donald Trump can make the case that he’s making good on his promises to stop US involvement in so-called “endless wars” in Afghanistan and Iraq by cutting troop levels. The Pentagon on Wednesday announced it would draw down the number of boots on the ground from 5,200 to 3,000. Military brass said the reduction was a reflection of Iraqi troop strength. That said, since the US assassination of Iranian military leader Gen. Qassem Soleimani in January, US personnel may be spending more time protecting themselves from attacks by Shiite proxies allied to Iran than playing a direct role in Iraqi reconstruction. The US troop draw down could embolden the Shiite players on the Middle East stage just as the poles of alliance are shifting in the region. The Emirati pivot toward Israel could lead to adventurism in the Shiite Crescent at a particularly dangerous time. Lebanon is still struggling to figure out how to address what turned out to be deadly government corruption, though it seems there is a lack of an alternative political class to right the ship. Iranian-proxy Hezbollah – part militia, part social overseer, part political group – has seemingly embraced reforms, a key element for any potential change. Now, US officials have targeting past ministers for their association with Hezbollah, though diminishing Hezbollah may be more difficult than reforming the Lebanese government. Officials in Beirut said the US sanctions amounted to a breach of Lebanese sovereignty. With the Shiite influence under threat, and with an aggressive Turkey lining up with Iran, the US troop draw down and the Emirati pivot may do more to destabilize the region than protect it.