Oil prices sank to their lowest in more than six years as further signs that China’s economy is slowing outweighed evidence that China’s big state oil companies have been aggressively buying crude on international markets.
World benchmark North Sea Brent crude futures closed on Friday at US$45.46 a barrel, down 76 cents on the day and the lowest closing price since spring 2009 after the financial crisis.
The oil sector in recent weeks has been swept up in the bearish sentiment raging through the world’s financial markets as worries have mounted that China’s long period of economic growth is braking more sharply than previously expected.
Commodities as well as financial markets have slumped, and Brent futures are down about 30 per cent since the end of June.
The unexpectedly strong demand for refined oil products, such as petrol and diesel, that had helped oil prices bounce from their lows in the mid-$40s in January to trade above $60 a barrel through June, has been overtaken by worries that demand will not hold up in the months ahead.
That shift in mood comes despite some recent signs that China’s demand for oil has been bucking the trend and increasing at a healthy rate.
Indeed, the latest data from China Customs on Friday showed that crude oil imports in July were the second-highest monthly total ever, averaging 7.25 million barrels per day (bpd), up 1.64m bpd, or 22 per cent, from the previous July.
Among China’s top suppliers, Saudi Arabia’s crude oil sales were up 9.6 per cent through July, to average just under 1m bpd.
Russia gained even more ground as its crude sales grew 30 per cent, making it China’s third-largest supplier at about 770,000 bpd.
Brazil saw the fastest growth among the top 15 suppliers, rising 126 per cent year on year to 265,000 bpd, making it China’s eighth-largest supplier this year.
The UAE has been China’s eleventh-largest supplier of crude, growing at 5.5 per cent through July to average about 220,000 bpd.
The strong buying by China of Middle East crude oil might continue and, according to the Dubai Mercantile Exchange and other sources, China’s largest oil trader – Chinaoil, the trading arm of China National Petroleum Corp – bought a record amount of oil already this month for October delivery, at 55 cargoes.
However, in the murky world of oil trading it is not clear at this point if Chinaoil will ultimately take delivery of those cargoes.
At the same time as Chinaoil was buying, Unipec, the trading arm of China’s largest chemical company, was a record seller of cargoes for October delivery.
It has become more difficult to gauge China’s actual demand as its major firms have become more aggressive traders as part of an effort to gain more control over pricing in the region.
Another aspect of this strategy has been its massive programme to build storage facilities for oil and oil products.
A significant portion of its oil buying in the past year has gone into new storage facilities, according to industry watchers.
As Energy Aspects analyst Amrita Sen points out, a 19 million-barrel facility at Huangdao and another 7.6 million barrel commercial storage unit in Hainan both opened in June, which together with other regular inventory building meant that probably about 32m barrels of July’s crude imports went into tanks for future use.
Similarly, there was stock building of petrol and diesel, although Ms Sen feels it is too early to determine whether the overall shrinkage in car sales in China will be outweighed by the move towards bigger vehicles, such as 4x4s, in terms of slowing growth in transport fuel consumption.
There is no doubt, however, that the overall sentiment in the world oil market is gloomy because of the supply overhang.
Even though there are more signs of a slowdown in production in the United States, with the latest rig count data showing a decline of more than half since last year, coupled with a Standard & Poor’s report showing that oil companies accounted for a fifth of debt defaults this year, there continues to be worry that world oil supply will outstrip demand in the months ahead.
Analysts such as Goldman Sachs’ Jeff Currie, who predicted in early July that Brent prices would drop to $45 per barrel by the autumn, see a risk of further declines in the coming weeks.
He still has a forecast that Brent prices will average $63 per barrel next year, but with “significant downside potential” because of new supply from sources including Iran, once sanctions are formally lifted on its oil exports.
amcauley@thenational.ae
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