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Commodities Week Ahead: An Oil Rally Will Need China Data, Not Just Supertankers

By Barani KrishnanCommoditiesFeb 27, 2023 17:16
ph.investing.com/analysis/commodities-week-ahead-an-oil-rally-will-need-china-data-not-just-supertankers-155288
Commodities Week Ahead: An Oil Rally Will Need China Data, Not Just Supertankers
By Barani Krishnan   |  Feb 27, 2023 17:16
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  • Oil longs may have to wait longer for affirmation of Chinese demand pickup
  • China’s NBS Manufacturing PMI, due Wednesday, could be mixed 
  • China may face challenges in turbocharging its economy post-COVID 
  • Oil, meanwhile, could stay in range and under pressure from a raft of U.S. data

A proverb in the Malay/Indonesian languages likens it to the owl that awaits night after night for the moon to emerge. That essentially is the story of oil bulls and Chinese demand data.

For nearly four weeks, the long-oil community has waited for data to affirm that China is buying crude like never before with the end of COVID controls in the world’s top importer of the commodity.

Wednesday’s PMI numbers will give investors a first blush into how China’s economic reopening is faring. Initial indications are that the reading could be mixed. Some analysts say they expect a rebound in consumer activity. Others forecast flat trends to allow at least another month to pass after the late January-to-early February Lunar New Year celebration.

As of Sunday, there was no consensus on what the so-called NBS Manufacturing PMI numbers could be. 

But some whisper numbers suggest the data could move back into contraction territory, with a reading of 49.8 in February from January’s 50.1. There are no expectations currently for the Services and Composite metrics - which last month printed at 54.4 and 52.9, respectively. 

Last month’s release was one of the first since China loosened its COVID measures, and sentiment in the diffusion index could’ve been impacted by the week-long Lunar New Year holiday. 

The January release saw all three NBS metrics move into expansion, with the report indicating that the release may have seen some Lunar New Year-induced tailwinds from demand in the manufacturing industry and consumer sectors. As a reminder, in late January, Chinese Premier Li said China would consolidate and expand the momentum of its economic rebound whilst accelerating consumption recovery and stabilizing foreign trade and investments. 

Li also said China needs to step up efforts to deliver on policies for the expansion of consumption. According to state news service CGTN:

“Solid steps will be taken to ensure the effective implementation of the policy package for stabilizing the economy and its follow-up measures. Key projects and equipment upgrading and renovation supported by fiscal and financial policy tools will be advanced to generate more physical gains.” 

The problem is all these may take a little longer than thought. 

While mobility data from road travel and public transportation showed that economic activity in major cities in China is increasing, the consumption picture on the industrial side was slow at best, Investing.com energy analyst Ellen Wald said in an article last week. She adds:

“More people were on the roads in major cities last week since the start of 2023, and more people have used the subway in these cities since before the pandemic. Restaurant dining, entertainment, and shopping also increased, indicating China is finally returning to pre-pandemic travel and commerce patterns. This seems to indicate a return to pre-pandemic levels of consumer demand for gasoline and diesel soon.”

But industrial activity was still lagging, Wald said. 

“Chinese consumer data indicates that purchases of big-ticket items like cars and homes are not rebounding and are continuing to decline. As a result, demand for industrial materials, such as steel and cement, remains depressed.

China’s industrial activity should pick up, but the data seem to indicate that this will take longer than consumer activity. Traders should, therefore, not expect to see oil demand in the industrial sector returning to pre-pandemic levels as quickly as consumer demand.”

Most analysts believe China will import a record amount of oil in 2023 as it tries to make a clean break for its economy after three years of underachievement caused by the coronavirus. 

There are many subplots unfolding as to how that demand might be coming together. Unipec, the largest oil trader in China and the trading unit of state-held refiner Sinopec (OTC:SHIIY), and PetroChina (OTC:PCCYF), the largest oil and gas producer, and distributor in China, have both hired ten supertankers in March to haul U.S. crude back to Asia, Bloomberg reported last week, citing people with direct knowledge of the matter. 

Each of the mega vessels can transport up to 2 million barrels of crude at a time. The loading of the tankers is expected to occur across U.S. Gulf Coast terminals, people familiar with the plan were quoted saying.

Notwithstanding these reports, the market still needs to see hard data on Chinese buying. Until that comes, crude prices could remain locked in a range.

In Monday’s session, New York-traded West Texas Intermediate, or WTI, crude for April delivery was at $75.85 a barrel by 02:10 ET (07:10 GMT), down 47 cents or 0.6%. The U.S. crude benchmark settled the previous week almost flat at $76.32, after being caught in a $75.75-$76.75 range.

Brent crude for April delivery, meanwhile, traded at $82.25 per barrel, down 57 cents, or 0.7%. Like WTI, the global crude benchmark finished last week flat as well at $83.16, after staying in an $82.16-$83.06 band.

While key Chinese data on oil is not yet on the horizon, there is a raft of U.S. data on a schedule that could ratchet up inflation concerns and more hawkish talk on rates from the Federal Reserve, keeping oil prices under pressure and in a range.

Economists say concerns over a “no landing” scenario for the U.S. economy — where strong growth keeps inflation elevated and prompts the Fed to keep rates higher for longer — was spooking markets. For what it’s worth, Fed Governor Chris Waller will be unveiling his outlook on the U.S. economy on Thursday.

U.S. data on tap this week include durable goods orders, consumer confidence and home sales. Tuesday’s consumer confidence data may be of particular interest, offering a glimpse into households’ views on economic prospects and inflation expectations. Economists are expecting an uptick to 108.5 after the index unexpectedly fell in January.

Aside from that, the ISM manufacturing and service sector reports for February will be released on Wednesday and Friday, respectively.

Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.

Commodities Week Ahead: An Oil Rally Will Need China Data, Not Just Supertankers
 

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Commodities Week Ahead: An Oil Rally Will Need China Data, Not Just Supertankers

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