U.S., China, Russia: No One's Backing Down as Oil, Gas Demand Rises

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Editorial by Geoffrey Lakings for Industrial Info Resources (Sugar Land, Texas)--As was mentioned in this week's IIR Market Scorecard, 'tis all about demand--at this time--for the oil crude & products market.


*MarCon (Market Condition 1-5, with 5 being the highest impact) indicates the directional bias or price effect for the relevant commodity (oil, natural gas, chemicals, etc.) and is graded by IIR's team of experts.

Per FXEmpire, West Texas Intermediate (WTI) has been pressured to the downside over the past week or so:



One wonders as to whether this demand will show up in the form of China consuming hydrocarbons. Recent reports indicate more crude will be imported by China:

• Reuters: China set for record crude oil imports in 2023, analysts say: China is expected to import a record amount of crude oil in 2023 due to increased demand for fuel as people travel more following the dismantling of COVID-19 controls and as a result of new refineries coming onstream, analysts said.
  The prospect of strong demand from the world's biggest importer will be another bullish factor for an oil market already supported by the OPEC+ producer group's output cuts and western sanctions on Russian exports.

Which is seemingly good news, in regards to China opening back up and the expected subsequent growth of its economy--the world's second-largest--to drive hydrocarbon demand. However, other reports hint this "expected growth and recovery" is not faring that well--especially at the consumer-spending level:

• Washington Post: China's economic recovery hinges on consumers. They're not spending: After three years of rolling lockdowns, including a particularly tough one in Shanghai last spring, China is confronting its worst economic indicators in decades. The country's GDP last year grew just 3 percent, a stark departure from growth of over 8 percent in 2021--and its lowest level since 1976, the year that Mao Zedong's disastrous Cultural Revolution ended.
  Experts inside and outside of China say that its $6 trillion consumer market will be central to getting the world's second-biggest economy back on track, not least because global demand for China's products remains sluggish.
  But the pent-up wave of consumer spending that experts predicted would follow the policy's end has yet to take shape.

However, consumers in the U.S.--the world's largest economy--are still spending. Well, at least on dining out:

• Yahoo!Finance: Consumers are still spending at restaurants despite inflation: Americans are spending more money to dine out than they are on groceries. Consumers spent more than $86.6 billion at restaurants in the month of January, up 24% compared to the same month in 2022, per the latest data from the U.S. Census Bureau. Spending on groceries, beer, wine, and liquor was up 5.3%, totaling about $78.9 billion last month.
  This comes as the cost of food away from home outpaced the cost of buying groceries. Per the Bureau of Labor Statistics' (BLS) January Consumer Price Index (CPI), the cost of groceries was up 11.8% year-over-year, while dining away from home was up 8.2%.
  Despite menu price increases to offset inflation at many restaurants and fast food chains, customers seem to be turning a blind eye to rising prices after being cooped up during COVID.

And the U.S. economy is still growing strong. Which normally would be good news, as a strong economy drives demand. However, the Fed has been trying to wrestle with inflation by slowing economic growth. Following a series of rate hikes through December, the Fed might raise rates again, maybe as high as half a basis point:

• FXEmpire: The Outlook for the US Economy, Oil Prices, and the Fed: Navigating the Challenges Ahead: The latest crucial U.S. economic data releases were singing the same song--higher for longer. Sizzling core readings in the CPI and PPI crushed hopes for a tidy melt in inflation. A ferocious recovery in January retail sales sequestered thoughts of a meaningful economic cooldown.
  Dreams of an imminent end to Fed rate hikes were lost in the haze of hawkish Fedspeak, after Presidents Mester and Bullard implied that a 50-basis-point hike could be on the table for the March Fed meeting.

All of this in context of the war in Ukraine, as Russia and China try to wrestle control from the U.S. in regards to world order:

• WSJ: Russia, China Challenge U.S.-Led World Order: A series of high-profile events on the international stage has laid bare the perilous state of great-power relations as Russia and China challenge the U.S.-led global order and raised the prospect that they could deteriorate further.
  Russian President Vladimir Putin said Tuesday that Russia would suspend its participation in the last remaining nuclear-arms treaty between Moscow and Washington, a vestige of the security architecture that has helped keep the peace for decades.
  With strains worse than at any time since the Cold War, Mr. Putin's threat to arms control in a speech in Moscow came a day after President Biden traveled to Ukraine and vowed "unending support" for Kyiv in a fight Mr. Putin considers an existential one for Russia.
  Also in the mix: China, whose top diplomat, Wang Yi excoriated the U.S. at a security conference in Germany before arriving Tuesday in Moscow to see Russian officials and, people familiar with the matter said, likely propose a summit between Mr. Putin and China's Xi Jinping.

The global energy markets are still striving to make sense of whether sanctions on Russia are actually hindering its war efforts in Ukraine. Russia recently announced it might pull 500,000 barrels--or more--from the market to drive up price:

• Reuters: Russia plans deep March oil export cuts: Russia plans to cut oil exports from its western ports by up to 25% in March versus February, exceeding its announced production cuts in a bid to lift prices for its oil, three sources in the Russian oil market said.
  Russia's Energy ministry declined to comment. Russia's pipeline monopoly Transneft did not immediately respond to a Reuters request for comment.
  Russia had already announced plans to cut its oil production by 500,000 barrels per day in March, amounting to 5% of its output or 0.5% of global production.

This comes as Nigeria has been increasing its supply--roughly 300,000 barrels--since the fourth quarter of 2022:

• The Guardian: Nigeria can hit 3mbpd of crude supply...: It further dimmed to 937,766 bpd in September. In October, 1.014,485mbpd; Nov, 1.186mbpd; and December, 1.235mbpd.
  Babalola said: "I am happy that Nigeria's crude production is rising above one million bpd. It should get better by the day because we are losing so much money with Nigeria not meeting its quota by the OPEC.

Russian supply cuts could still happen, as it appears the Russian economy has not been as impacted as Western nations had hoped:

• DW: Ukraine war: Russia's economy holding out against sanctions: In a statement, EU leaders described "massive and severe consequences" for Russia. Economists predicted a huge plunge in GDP. Weeks after the sanctions were brought in, the White House said in a statement: "Experts predict Russia's GDP will contract up to 15 percent this year, wiping out the last fifteen years of economic gains."
  It hasn't happened. While the past 12 months have been very challenging for the Russian economy, it has performed far better than expected.
  Getting a clear picture is ultimately impossible. The Kremlin made a lot of key economic data classified after it launched the war on Ukraine and it remains so today. The underlying shape of the economy is uncertain. However, it's already obvious that the collapse many predicted has not materialized.
  "I think we can say that the economy shrank a lot less than the 10 to 15% that people were talking about at the beginning of the war," Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University, told DW.

Maybe the February 5 sanctions on Russian refined products will have the desired effect on the Russian economy. Nonetheless, these sanctions could be lifting rates and likely will impact the U.S. and European consumers:

• FreightWaves: Diesel price down, but impact of Russian sanctions may be lifting rates overall: The benchmark price for most diesel fuel surcharges fell Tuesday even as diesel futures took an upward move completely at odds with the rest of the petroleum market, possibly signaling that sanctions against Russian diesel are having an impact.
  The Department of Energy/Energy Information Administration price, published a day later than usual due to the Presidents Day holiday, dropped 6.8 cents per gallon Tuesday to $4.376. It's the lowest price since the $4.104 posted almost exactly a year ago, the final rate published by DOE/EIA on Feb. 28, 2022, that would not have felt the full impact from Russia's invasion of Ukraine just a few days earlier.
  Tuesday's DOE/EIA price came even as diesel futures on the CME commodity exchange took a sharp move higher Monday despite declines in the settlement price of other futures contracts in the petroleum complex.

Europe could be looking to the U.S. to supply diesel to replace what was coming from Russia. This and other factors will keep U.S. refinery utilization rates high for this year and the next:

• IIR News: EIA: U.S. Refinery Utilization to Stay Above 90% in 2023-24: "We also forecast that increased production of finished petroleum products as a result of high refinery utilization rates will contribute to lower prices," the EIA continued. "The ban on imports of refined petroleum products from Russia into the EU, which began earlier this month, poses a risk of additional disruptions and brings significant uncertainty to our forecast."
  For 2023 and 2024, Industrial Info is tracking nearly $3.2 billion worth of refinery turnaround kickoffs in the U.S. ... Some of the more substantial turnarounds planned this year include those at:
  
  • Delta Airlines Incorporated's (Atlanta, Georgia) 185,000-barrel-per-day (BBL/d) Trainer Refinery in Trainer Pennsylvania. The turnaround is planned for third-quarter 2023.
  • Phillips 66's (NYSE:PSX) (Houston, Texas) 260,000-BBL/d Lake Charles Refinery in Westlake, Louisiana, planned for third-quarter 2023.
  • Phillips 66's Bayway Refinery first-quarter 2023 Fluid Catalytic Converter Unit (FCCU) and Sulfuric Alkylation (SF Alky) Unit in Linden, New Jersey.

But the U.S. has shuttered & closed roughly 2 million barrels of refining capacity since 2018. And, though there are projects on the books to increase U.S. refining capacity, there is a low probability, according to IIR, this actually will happen:

• Argus: Completion doubts abound for new refining: Nearly 1 million barrels per day of new U.S. refining capacity is under construction or planned for investment in the coming years, but many of those projects are unlikely to be completed on time or at all.
  "IIR Energy has all of these at low probability right now and they will not be increasing probability until they [the refineries] reach final investment decision," IIR energy market correspondent Hillary Stevenson said at the Argus Americas Crude Summit in Houston, Texas [last week].

Therefore, the question remains: Will demand drive oil prices back up, or will many other factors at play temper the price?

Therefore let IIR Energy's Dedicated Market Research place the world at your fingertips. Tomorrow's News Today. Ask us! We have answers!

As your feedback is very important to us, please let us know if we can provide additional color or answer any other market questions.

Additional IIR Resources:

• IIR Team Email: iirteam@iirenergy.com
• Latest IIR Crude & Products Market Scorecard

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).