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Chinese Energy Demand Concerns Ahead

CRUDE OIL

While the energy markets managed to discount negative macroeconomic signals earlier this month, disappointing Chinese economic data overnight unrelenting gains in interest rates, persistent strength in the US dollar and a 1.9% increase in January through July Chinese crude oil production appears to have temporarily broken the back of the bull camp. Obviously, growing fears of deflation in China combined with chatter of a possible financial contagion raise concerns toward Chinese energy demand ahead. However, it should be noted that Chinese July crude oil refinery throughput was up 17.4% versus year ago levels indicating Chinese consumption remains robust. With OPEC, IEA, and EIA releasing expectations of a jump in 2024 supply longer-term bullish views toward energy prices are undermined. On the other hand, OPEC did raise its 4th quarter 2023 global demand forecast by 700,000 barrels per day, but that news was heavily countervailed by lower first and 2nd quarter 2023 demand estimates. Another pressure on crude oil prices (especially in the US) is the unfolding uptrend in the US dollar which appears to be “winning by default”. It should be noted that Middle East sellers continue to raise prices to Asian customers which could result in a slowdown of September imports particularly by India. On the other hand, supply and demand look to remain tight, but a measure of back and fill is justified given the aggressive gains early this month. A potential major negative for US oil prices are reports of low water conditions at the Panama Canal with backups growing and buyers likely to seek alternative supply.

Energy production

NATURAL GAS

Yesterday the bull camp was presented with very bearish news regarding the refilling of strategic gas supplies in Germany and the euro zone. In fact, inventories are already running substantially above year ago levels with some traders expecting full capacity refilling before temperatures begin to decline. Granted, US temperatures have started to heat up, but temperatures are only slightly above normal and are unlikely to result in a significant late season supply tightening. Furthermore, ongoing gains in the US dollar could dent demand for US LNG and in turn result in supplies backing up in the coming shoulder season. In the end, without very broad sustained 100 degree plus temperatures in the US the surplus versus the five-year average will not tighten significantly without a catalyst like a hurricane threat. The path of least resistance is expected to remain down as demand prospects do not offer up chances for a buying spree by the utilities.

 

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