Has Oil Bottomed? If Demand is So Low Due to China, Why isn’t Copper Showing Any of the Same Patterns?

If oil demand is down so much due to the China trade war and tariffs, how come the more economically sensitive materials, such as copper, have not felt the same economic downward price effects?

Today China has asked it’s refineries to hold off on placing new orders for crude oil imports in anticipation of lower prices once and if demand stalls further. The Chinese buyers have cut off purchases of U.S. crude oil as the trade dispute between Beijing and Washington continues.

Last year, between January and June, China was the single biggest buyer of U.S. oil, West Texas Intermediate (WTI) at a daily rate of 377,000 barrels. The Chinese greatly reduced their US imports of WTI in October of 2018, dropping to 41,600 bpd for the six months up to February this year, although China’s total imports continued rising steadily. That decline worked out to be about 2.6 million barrels of oil a week. You can almost see since October of 2018 the US inventory growth of about 2.6 million barrels of oil per month, according to the U.S. Energy Information Administration (EIA).

This chart is the EIA oil build (source Investing.com).

U.S. crude oil shipments to China plunged in September 2018 to just 600,000 barrels in the month, compared to 9.7 million barrels for the month of August.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as Medium crude oil because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of New York Mercantile Exchange’s oil futures contracts. The price of WTI is often included in news reports on oil prices, alongside the price of Brent crude from the North Sea. Other important oil markers include the Dubai Crude, Oman Crude, Urals oil and the OPEC Reference Basket. WTI is lighter and sweeter, containing less sulfur, than Brent, and considerably lighter and sweeter than Dubai or Oman.

The inventory build up started in September/October 2018, just when China stopped buying from the US and diverted to North Africa.  It appears the 2.6 million barrels a month is almost the exact amount that China stopped buying from the US.

In the past few years China’s economy has “slowed” to an annual rate of about 7%. Now the government is claiming 6% is the bottom line for growth in 2019. Even though that is consider a slow down (to go from 7%  to 6%), it should not slow China’s demand for oil from steady growth to almost no growth. China completely halted buying US oil and what they are buying (and when) is not being documented in a timely manor. There is no transparency. The world’s oil experts are focused on the China oil demand, claiming this is the central reason we have depressed oil prices. Can China growth slowing from 7% to 6% really be responsible?

Also if we had slowing economic growth in China, shouldn’t copper prices be much more in line with oil? The Copper price and outlook is consider more sensitive to economic growth as it is used in building construction and new industrial production. It has seen some volatility but nothing like oil, especially WTI.

What about copper prices?

Source : Investing.com

WTI oil saw a much more pronounced decline due to the trade war starting in October, but it has also seen a lesser recovery even though the US has placed restrictions and bans against Iran and Venezuela oil. In addition, OPEC+ (or OPEC plus Russia) also reduced their production, decreasing overall market supply.

Source : Investing.com
Copper is a chemical element with the symbol Cu  It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pinkish-orange color. Copper is used as a conductor of heat and electricity, as a building material, and as a constituent of various metal alloys, such as sterling silver used in jewelry, cupronickel used to make marine hardware and coins, and constantan used in strain gauges and thermocouples for temperature measurement.

If copper is showing recovery, why isn’t oil? The great US oil stockpile build up can be traced almost to the day China stopped buying, and the build is almost the same inventory level that China stopped buying  from the US.

Most of the world oil production slowdown is due to demand, and that is greatly influenced by China. When the Chinese government told its refineries to stop buying, the oil prices got cheaper. Do we have a real demand problem? Or do we have a major country that is trying to use the Trump tariff as a tool, to better manipulating oil prices and buy cheaper, while at the same time hurting America oil companies, and blaming Trump and US tariffs all along the way. If, in time, this is proven to be a Chinese deception, I would only wish our politicians could be so clever.

Is the world overreacting to the demand side of the equation when we might soon see an oil premium due to war with Iran? The Permian WTI oil production growth has greatly declined since the end of 2018 due to lower market prices. We’re seeing the combination of a significant demand miscalculation, lower supply growth, and rising tensions with Iran in the Strait of Hormuz— an area that ships almost one-fifth of the world’s oil. These are the perfect conditions to cause a shocking explosion in oil prices.

 

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Jay Black

I try to write fact based articles that most people won't. Lets improve this world including both Corporate and Government malfeasance. If you have a lead about a ethical failure please comment on my article or in many of my comments.

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