Some Very Crude Perceptions


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Misleading perceptions can be very dangerous – especially when they apply to the crude-oil futures markets.

“The price has more than doubled this year partly because of the belief that the recovery in Chinese oil-import demand is all about booming local consumption” said a source on the sidelines of this week’s APPEC oil and gas conference in Singapore.

But China is adding around 25m tonne/year of refinery capacity in 2009, which, of course, requires a lot more oil to operate.

Liberalisation of fuel-price controls has raised refinery profitability, resulting in recent operating rates of more than 80%.

This high throughput hasn’t been matched by an equivalent increase in gasoline consumption, despite the humongous increase in vehicle sales.

“People seem to be buying lots of new cars, driving them home to impress the neighbours but not driving them much after that,” said Jason Feer, vice-president and general manager, Asia Pacific, of the Argus Media Group in a speech at the conference

Fuel-price liberalisation has pushed the cost of gasoline close to US levels, he added afterwards.

This miss-match between supply and demand could be a factor behind China becoming a bigger exporter of gasoline and diesel.

China exported 505,505 tonnes of gasoline in September – 153% higher than a year earlier, according to China Customs.

Diesel exports have also risen, reaching close to 400,000 tonnes in August and 293,759 tonnes in September.

This led to talk of overseas refinery margins being put under pressure for the long-term by China’s exports.

But another source said: “This is just one of those conspiracy theories about China. Any company will export when it makes more economic sense.

“China’s refiners are listed, remember, and so operate like listed companies. Exports are not a long-term strategic objective.”

Another factor behind the rise in fuel exports was unwinding of big inventories built ahead of last year’s Beijing Olympics, he said.

What’s clear is that the rise in oil imports this year – expected to be around 5% – isn’t just a sign of an immediate surge in domestic consumption.

And as we’ve already covered on this blog, China’s overall growth story is not as straightforward as crude and equity markets appear to believe – another nail in the bull’s coffin.

A further misleading view was that we were already in a V-shaped recovery, believed a number of delegates.

“I expect the recovery to be W-shaped,” said Gati Al-Jebouri ,Chief Executive Officer of Lukoil, in a speech to the conference.

One of the economic threats he highlighted was fiscal tightening.

Australia has twice raised interest rates over the past few weeks, Norway recently raised rates and India has tightened reserve requirements for the country’s banks because of inflation concerns.

A string of comments from US Fed hawks indicate a possible change in direction.

If fiscal tightening isn’t timed properly, it might come too soon for a fragile recovery.

Higher interest rates could narrow the contango that’s helped make storing crude, gasoline and diesel etc a low-risk option.

Very high storage levels don’t fit with current crude prices.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $79.71 a barrel this morning, down 69 cents in the Globex electronic session.

December Brent crude on London’s ICE Futures exchange fell 70 cents to $78.19 a barrel.

I found it hard to find any delegate who found much logic in today’s price of oil.

“It could easily more or less half to $40 a barrel in the New Year. That’s where it should logically be,” said one delegate.

Admittedly, though, one tends to seek out those who support your biases – and I could be described as a tad pessimistic about this recovery.

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