Crude: Good China, bad China?

January 13, 2017 08:24 AM
Daily Energy Markets Report

Crude oil prices had a solid rally on evidence of OPEC production cuts and strong China demand; and while there are predictions for more record-breaking demand in China, the new year is bringing disturbing Chinese export data and more tightening of capital controls. This is raising some concerns about the trajectory of growth in the world’s second largest oil consumer.

Let’s talk a bit about the good China news. China crude imports hit a record 8.56 million a barrels day in December. That number helped boost oil. But this morning data showed that Chinese exports fell by a more than expected 7.7% last year in what was the second annual decline in a row and the worst since the depths of the global crisis in 2009, according to Reuters.

The falling export data is one reason the Chinese want to buy gold and bitcoin and to try to move capital out of the country, and the reason China is clamping down not only on capital but bitcoin as well. China right now seems more interested in keeping capital in the country than focusing on growth overall. We have to watch this situation develop because this is one threat to what is an otherwise wildly bullish scenario for oil in the coming year. It is not a bull killer but it has to be watched.

Even though many were skeptical about this OPEC/non-OPEC deal, the cuts are indeed happening, as I said they would. Market Watch reported that Saudi Arabia said Thursday it has cut its production to under 10 million barrels a day to a two-year low. If confirmed, the reduction would be more than the 486,000-barrel-a-day cut it had promised. The OPEC monthly report on January production will be released in mid-February. The Saudis told its Asian customers it would reduce supply to the region in February. Russia’s energy minister Alexander Novak said that Russia also cut its January oil production. Algeria is adhering to its promised cut too. OPEC and non-OPEC want to prove they are for real and the doubters had better beware because all the evidence is showing full compliance and in the case of a few countries, more than full compliance.

Bring on the cold. Natural gas had a bullish report along with some colder forecast for late January and maybe into May according to Accuweather. The  Energy Information Administration reported that supplies of natural gas fell by 151 bcf. Total stocks now stand at 3.160 trillion cubic feet, down 363 billion cubic feet from a year ago and 4 billion cubic feet below the five-year average. While the warm up may slow the rally, the market is starting to get that demand may continue to draw down supply below average even with what may be a brief warm up. If you get a break buy it. 

We still feel that the low for the year for oil could be in assuming that China concerns don’t sink us. Buy breaks in oil as well. We had our best year in oil since 2009 last year and this year we should do even better.  

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.