A slowdown? It's not showing up in the auto sales.
Passenger vehicle sales reached 1.78 million in June, or up 17.7% over the same month last year, according to the China Association of Automobile Manufacturers. Car sales remain strong this year, thanks to a tax cut for vehicles with engines under 1.6 liters last November. Most of the strength came from SUV sales, which increased nearly 40% year over year.
We don't think the recent strength will continue despite us being oil bulls. The lingering tax cut incentivized a lot of people to purchase cars now rather than later, fearing the tax cut would go away. The recent strength in growth would likely level off in the coming months, but gasoline demand should remain strong in China.
Refineries Cut Throughput
Refineries in Asia are having to grapple with some of the lowest crack spreads in years as a glut of refined products send margins to new lows.
If refineries around the world cut back on throughput, gasoline storage would draw down, but crude storage would build. Markets might be concerned about the increasing storage level leading to lower prices. Despite WTI and Brent being down today, gasoline was actually slightly up. Heating oil also inched up a bit.
The thing to pay attention to if you don't have the crack spread quotes is to just look at how gasoline and heating oil trades vs. WTI and Brent. If WTI moves down, but gasoline prices go up, then the refinery margins are increasing and vice versa. Oil traders we spoke to points to this as their number one short-term headwind for oil prices. The supply side is tightening and they are seeing that on the physical flow, but refineries need to still keep throughput high to drawdown crude inventory, and they aren't very certain of that.
WTI just closed below $45, and refinery margins have barely rebounded. It's either gasoline prices have to go up, or WTI has to go lower. What do you think will happen to refinery throughput? Let us know in the comment section below.
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