China's Crude Buying Is On The Rise

Oct. 23, 2020 3:46 PM ETUSO, UCO, SCO, BNO, DBO, USL, OLEM, OILK, OILX169 Comments38 Likes

Summary

  • China's crude buying is on the rise again.
  • Dwindling floating storage is a sign of lower buying during July, August and September.
  • Physical spreads have started to improve with China back on the market despite more production coming from Libya.
  • Market sentiment remains bearish with 27% of open interest being on the short side from money managers.
  • So clearly sentiment along with positioning is keeping oil prices from moving higher, but from a physical market standpoint, the higher Chinese crude buying will offset the increase from Libya and more.
  • Looking for a helping hand in the market? Members of HFI Research get exclusive ideas and guidance to navigate any climate. Get started today »

Welcome to the China edition of Oil Markets Daily!

Last week we saw comments about how if China's floating storage disappeared, it means lower Chinese crude buying. This couldn't be further from the truth. Floating storage dwindling implies that the number of incoming vessels is lower than the required demand, which then pushes floating storage onshore.

As a result, so long as you have a timeline for when the imports are set to deplete the excess floating storage, you can back out just when China may start to return in the market and start buying crude again.

Based on what we were seeing on the floating storage front and vessels going to China, we noticed that people were misinformed to think that China wasn't buying more crude.

How do we know that China has actually returned back in the market?

Well for starters, ESPO, East Siberia-Pacific Ocean, spread directly reflects how much teapot refineries in China are buying. ESPO spreads have improved to a multi-month high of $2/bbl versus a 50 to 60 cent premium last month.

And major media outlets are starting to pick this up:

For those of you without access to Bloomberg and other fancy data, you can simply look at the Brent timespreads to see the pick-up in the physical market.

Source: Barcharts (save this link)

Finally, we can tell by the sheer number of tankers going to China in October to notice that they have been buying more.

Now China is probably the brightest spot in the oil market with declining US oil production coming in second place. Rising COVID-19 cases and potentially more government-imposed restrictions in Europe could see demand go down. This presents a headwind along with Libya oil production coming back, but fundamentally speaking, global oil inventories will continue to decline into year-end.

Another point we want to make is that often times when we see these sideways price actions, CTAs are showing inconsistent buying and selling.

Source: 3Fourteen Research

According to Warren Pies at 3Fourteen Research, CTA and money manager positions are quite bearish with 27% of open interest in the short side.

So clearly sentiment along with positioning is keeping oil prices from moving higher, but from a physical market standpoint, the higher Chinese crude buying will offset the increase from Libya and more. And while the jury is still out, it does not appear that the European slowdown has impacted the physical market... yet.

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