Risk-off bias reigns
Fed rate hike sends oil prices near 2-week low; ANS hovers above $90
Alaska North Slope crude clung precipitously to the $90-plus range Sept. 21, sliding by 87 cents to close at $90.55 per barrel. West Texas Intermediate fell $1.51 to close at $82.94 and Brent slid 79 cents to close at $89.83.
See chart for this story in the online PDF.
Bears continued to claw support away from oil prices under a decisive risk-off bias pervading financial markets in the lead up to a Sept. 21 rate hike decision by the U.S. Federal Reserve. The Fed raised its target interest rate by 75 basis points, and although the move was widely anticipated, oil prices neared a two-week low on the day.
The U.S. dollar rose, dealing more pain to economies that must convert local currencies to pay dollar-denominated oil prices.
News from Asia blew headwinds as well.
The Asian Development Bank downgraded its 2022 growth forecast for developing Asia, citing COVID-19 lockdowns in China, conflict in Ukraine and economic friction from efforts to combat inflation, The Straits Times reported Sept. 21.
The forecast - covering the 46 members of the ADB stretching from the Cook Islands in the Pacific to Kazakhstan in Central Asia - was cut to 4.3% versus the ABD’s April forecast of 5.2%. The region grew 7% in 2021.
China’s growth forecast for 2022 was reduced to 3.3% from 5%, as Beijing pursues its punishing zero-Covid-19 strategy, The Strait Times said.
ADB Chief Economist Albert Park said, “risks loom large” for the region, adding, “A significant downturn in the world economy would severely undermine demand for the region’s exports.”
Demand reduction fears for Asia and China have been a recurring theme in bearish oil price action.
Traders for now are discounting the fact that China’s lockdowns will eventually be lifted, and that domestic mobility on the ground and in the air will bounce back, while international air travel to China will rise from its current low levels.
The skies are wide open. Even New Zealand, which was notably isolationist in its initial response to the coronavirus epidemic, has dropped requirements for international arrivals to test for COVID-19 before departure, and international visitors are no longer required to present proof of vaccination for the virus.
Demand in ChinaThe U.S. Energy Information Administration, in its September Short-Term Energy Outlook, forecast that China’s petroleum consumption will increase in 2023 to record highs.
China has completed projects to expand refining capacity this year, and it has projects under development that will expand domestic refining capacity next year to support increased consumption, the EIA said. To meet expected increased consumption, China will likely continue to import crude oil imports and increase domestic production.
On the other hand, EIA forecast Russia’s oil production to decrease in 2023 once the EU economic sanctions are in full effect.
China’s total crude oil imports decreased in recent months, however, crude oil imports from Russia have increased, the EIA said in a Sept. 21 release.
“Russia is typically China’s second-largest source of crude oil imports, slightly behind Saudi Arabia, and imports from Russia have generally increased over time, both in volume and share of imports,” the EIA said.
China’s crude imports from Russia increased from 8% of crude oil imports in 2011 (slightly less than 400,000 bpd) to about 16% of imports in 2021 (1.6 million bpd) and to as much as 21% in August 2022 (2.0 million bpd), the EIA said, adding that the share of total imports from Russia was 20% in June and 19% in July.
As China’s thirst for crude oil grows, and if Russia’s production drops as the EIA expects, China will be casting about for new sources of oil.
In a June 2022 release, the EIA said new projects, particularly in China and the Middle East, could add more than 4.0 million bpd of new capacity over the next two years.
“Many of these new refineries are located in coastal areas and have easy access to export refined products that are not consumed domestically,” it said.
The scenario is bullish for North Slope crude. As has been shown in the recent past, when China and its Asian neighbors step up crude purchases, they hoover up Pacific cargoes that would otherwise have competed against ANS on the West Coast.