Chinese Fragility Spooks Financial Market

Oil prices dropped significantly yesterday following shockwaves caused by Evergrande, a Chinese real estate behemoth. The company, which owes $300 billion to its partners and earned just $8 billion this year, has seen its stock price fall 85% over the past six months. Some have compared their financial woes to the Lehman Brothers’ collapse in 2008, which precipitated the Great Recession. If Evergrande were to experience a similar collapse, defaulting on debt to their partners, then the ripple effect could affect hundreds of companies – possibly even spreading to other countries. Although Chinese regulators are expected to contain the damage, it shows fragility in China’s economy. Given China’s status as a major oil importer, economic missteps could dramatically impact oil demand in the future.

Looking closer to home, crude inventories continue sinking, keeping oil prices relatively high despite economic volatility. The EIA reported today that inventories are down 40% since the beginning of this year, putting them 26% below the five-year average. Why does that matter? According to the article: The Cushing storage hub is the crude oil delivery point for the NYMEX West Texas Intermediate (WTI) crude oil futures contract and is home to 14% of U.S. commercial tank and underground crude oil working storage capacity.

Along with steep Cushing draws, total US oil inventories are down as well. June’s 35 million barrel draw from crude inventories was the largest since the EIA began tracking in 1981. Oil is falling at 40-year high rates due to strong demand worldwide, while US supply remains weak. Recently, Gulf production outages have caused even more inventory concerns – 18% of production is STILL offline, more than three weeks after Hurricane Ida shut all offshore rigs.