Overview: Weak Chinese data pressure prices

Chinese state-owned refiners are drawing crude from stocks to use as feedstock, while the country's independent sector is running at relatively low rates

Weak Chinese economic data pressured prices but crude stockdraws are lending some support, especially to light sweet grades.

Atlantic basin benchmark North Sea Dated fell by 77¢/bl to $86.39/bl in the week to 18 July. Mideast Gulf medium sour marker Dubai was down by 89¢/bl to $84.29/bl, but US light sweet WTI gained by 20¢/bl to $82.82/bl.

Chinese GDP growth slowed to 4.7pc in the second quarter, with consumption weak, including lower diesel demand alongside decelerated construction activity. Chinese demand for crude imports is relatively slow, as state-owned oil companies draw crude from stocks and Shandong province independent refiners run at below-average rates of less than 70pc.

US crude inventories fell by 4.9mn bl in the week to 12 July to close at 440mn bl, led by declines on the Gulf coast. Inventories have shed 20.5mn bl over the past three weeks, leaving stocks 17.2mn bl below the same week last year.

The WTI Cushing market is seeing increased demand for prompt crude, which is steepening backwardation — prompt premiums to forward values — and August Nymex WTI firmed by 50¢/bl relative to the September contract. Its discount to Ice Brent has also narrowed, making US crude exports harder to work.

A scheduled two-week, 160,000 b/d shutdown at ExxonMobil's Liza-1 production vessel offshore Guyana this month is cutting into global light sweet supply, with a similar suspension to follow at Liza-2 in August.

Light sweet Nigerian grades climbed as demand rose, and differentials firmed by $1.50-1.60/bl relative to North Sea Dated. Libyan Es Sider's differential rose by $1.80/bl to a four-month high as lower freight costs made it more competitive, compared with similar Nigerian crudes.

Wildfires near Alberta's oil sands are helping to support Canadian heavy crude, including at Cushing, where it can be blended with light production into benchmark grade Domestic Sweet. Canadian WCS' discount to calendar-month average WTI narrowed by $1.27/bl. Heavy Canadian crude also continues to be supported by its increased access to the Pacific coast through the newly commissioned 590,000 b/d Trans Mountain Expansion pipeline. And Iraqi Basrah Heavy's premium to its formula price rose by 20¢/bl as Mediterranean refiners sought cargoes for delivery in September, when bitumen demand firms.

But medium sour grades were relatively weaker. August-loading Iraqi Basrah Medium's premium to its European formula price fell by 25¢/bl as the long journey time around the Cape of Good Hope means that supplies will arrive in September or later, when Europe's seasonal demand for transport fuels will have cooled. Congolese Djeno shed 50¢/bl as participants expected the grade to trade well below current offer levels, given cheaper offers for medium sour Oman.

Oil products inventories on the water are high, as an intensification of the Yemen-based Houthi attacks on shipping boost diversions away from the Suez Canal, but demand for diesel and gasoline remains generally weak.

The US Gulf coast diesel crack spread fell by over $1/bl and diesel exports have been slow this month. But the arbitrage from Texas to Indiana opened for the first time in three months following a shutdown at ExxonMobil's 252,000 b/d Joliet refinery in Illinois, following severe weather.

The European diesel crack spread was down by $2/bl on the week at $16.59/bl. This comes despite a drop in US imports because of poor arbitrage economics and lower Turkish supply because of a persistent issue at a diesel-producing unit at Turkey's primary export refinery. Europe remains beholden to longer supply chains, mainly from east of Suez suppliers, meaning that any prompt spike in demand is unlikely to be met by short-haul suppliers.

European gasoline demand remains thin, with recent data showing lower demand from Sweden and France year on year.

Fed focus

Despite lacklustre US demand signals, there is some expectation that oil demand will pick up if the Federal Reserve cuts interest rates this autumn. A rise in US jobless claims last week brought the total to the highest in 10 months, suggesting a weaker labour market that could encourage the Fed to begin cutting borrowing costs. Lower borrowing costs could spur economic activity and, in turn, drive up oil demand.