WEEKLY ENERGY RECAP: Despite sell-off, spot market is tight

Workers are seen at the damaged site of Saudi Aramco oil facility in Abqaiq, Saudi Arabia. (Reuters)
Updated 06 October 2019

WEEKLY ENERGY RECAP: Despite sell-off, spot market is tight

  • Demand is strong for Arabian Gulf crude grades after a return to pre-attack production

Oil prices continued to deteriorate for the second week in a row. Brent crude dropped below the $60 barrier for the first time in a month. 

Brent fell to $58.37 per barrel which is close to the level it was before the attacks on Saudi Aramco oil facilities on Sep. 14. 

WTI also fell to $52.81 per barrel. 

Worrying economic news continued to put downward pressure on the market. However, the focus should not be on the slowing economic outlook that is detached from oil market fundamentals. 

The market continues to shrug off the possibility of serious supply threats. Conventional oil discoveries have plunged to a seven-decade low with no signs of any speed recovery amid lower capital expenditure investments. 

This coincides with OPEC oil output falling to an eight-year low in September.

At the same time, output from the US and Russia, also fell to 11.81 million bpd and to 11.24 million bpd respectively.

Right after the Saudi Aramco attacks, many speculators took advantage of the short-lived price spike as a major opportunity to sell older positions and lock in profits. 

However, after oil prices plunged for the second week in a row, money managers reduced their net long positions in Brent futures.

That was largely because speculators have been discouraged by the weakening macroeconomic outlook which of course implies weakened demand for oil.

However, demand remains strong for Arabian Gulf sour crude grades despite a return to normal Saudi pre-attack production levels.

The physical spot market remains extremely tight, reflected in steep Dubai backwardation and higher official sales prices (OSP) for November Arabian Gulf sour crude grades. 

The Russian crude grade, ESPO, also fetched high premiums despite the restoration of supply in the Kingdom. 

Brent-linked crudes are still not economically cheap enough to flow into Asia to compete with the Arabian Gulf sour crudes.

• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq

Despite agreement, China purchase of US agriculture lags

Updated 10 August 2020

Despite agreement, China purchase of US agriculture lags

  • The two sides are set to meet on Saturday to discuss the deal, American media says

NEW YORK: Seven months after the United States and China signed a preliminary agreement to temper their trade war, Beijing’s purchases of US agricultural goods have yet to reach the deal’s target.

As President Donald Trump readies for a tough reelection battle in November, US media reported the two sides are set to meet beginning August 15 to discuss the deal, which calls for China to sharply increase buying American goods and services this year and next.

But according to data compiled by the Peterson Institute for International Economics (PIIE), Chinese agricultural purchases at the end of June were far from where they should be at this point in the year.

They had reached only 39 percent of their semiannual target, according to US figures, or 48 percent, based on Chinese figures.

“If we get back to what the level of trade was in 2017, we’ll be lucky,” said Chad Bown, a PIIE senior fellow who authored the study, referring to the year before the trade war began.

Under the deal’s terms, China agreed to increase agricultural imports $32 billion over the next 2 years from 2017 levels.

Chinese orders for corn and soybeans have increased since mid-July, with Beijing buying just over 3 million tons of American oilseeds between July 14 and Aug. 7, according to US Department of Agriculture data.

At the end of July, the United States reported the largest-ever daily order by China for its corn, of 1.9 million tons.

The announcements were a relief to US farmers, who are expecting a bumper crop this year and need to find buyers to take it.

They also came at a time of high political tension between the two countries, after the Trump administration authorized sanctions against several Hong Kong leaders over the rights crackdown in the city, and restrictions on Chinese apps WeChat and TikTok.

The Chinese “realize we’re not being the best of buddies right now, but they need the products and they’re gonna take as much as they need,” said Jack Scoville, agricultural market analyst for Price Futures Group.

It’s possible that Beijing will change its orders from buying this year’s harvest to next year’s.

But analysts warn that any orders could be called off before the ships carrying them leave port.

Brazil and Argentina, two of the world’s largest soybean and corn producers, are starting their harvests next spring, said Brian Hoops, president of the brokerage firm Midwest Market Solutions.

China “could cancel all these purchases they made in July and buy at much cheaper prices if that’s available to them,” Hoops said.

The trade deal dubbed “phase one” and signed in January has managed to survive both the tensions and the sharp global economic downturn caused by the coronavirus pandemic, which has badly hit international trade.

US Trade Representative Robert Lighthizer in June said China would follow through on its commitments, while Washington would also pursue a “phase two” trade deal that “will focus on issues of overcapacity, subsidization, disciplines on China’s state-owned enterprises, and cyber theft.”

Bown said any success in getting China to buy not just farm but also energy and manufactured goods, would aid Trump in his reelection campaign.