Economic Hiccups in China Weigh on Oil Prices but Not Production

Continued price increases in 2023 and signs of strain in the Chinese economy have paused the recent upward trend in energy futures. This morning, prompt crude futures are down after closing lower yesterday on concerns over China’s economic vitality following unsettling inflation and industrial data. In an unexpected move, the People’s Bank of China cut the medium-term lending rate by 15bps to 2.5%. These economic trends and lower liquidity have caused Brent’s prompt spread to reach its peak backwardation since last November.

Despite some forecasters predicting an impending recession, Goldman Sachs Investment Research (GIR) offers a glimmer of hope, suggesting the possibility of a soft landing. The US, in particular, exhibits economic tenacity with positive signs in the labor market. Recent Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) data hint at a slightly accelerated disinflation. As the developed markets approach the culmination of their rate hiking cycles (with the Federal Reserve probably at its end), GIR anticipates a predominantly hawkish stance. Their projection is that central banks will only cautiously move toward neutral rates, assuming a recession doesn’t materialize. They foresee stability in long-term rates and oil prices, aligning with the Federal Reserve’s revised higher levels.

In the latest release of the U.S. Energy Information Administration’s (EIA) August Drilling Report, the expectation is a drop in crude production by 20 kbpd between August and September. Detailed insights revealed fluctuations in various regions, such as the Permian, Eagle Ford, and Anadarko, among others. From June to July, there was a reduction of five in the Drilled but Uncompleted wells, bringing the total to 4,787. The EIA also anticipates that oil and natural gas output from the nation’s shale regions will reach 9.41 million b/d, the second monthly decline in a row.

China’s oil production is on the rise despite its economic troubles. July saw oil throughput reaching a three-month peak, attributed mainly to the conclusion of maintenance activities in state-owned plants. This spike is the most pronounced since April 2023, reaching about 14.93 mmbbl/d. Refinery operating rates also set a new record in early August at 81.19%, and projections hint at further escalations in the month.

August gasoline demand is suggested to rise above July levels. Heat-induced refining challenges seem to be continuing as we approach the Labor Day weekend in the coming weeks. Various indicators are pointing toward market stabilization, however, there are a lot of factors at play that will determine the global outlook on energy futures.