After buying as much crude as they could in the first quarter because of the low price of oil, Asian refiners are starting to cut back on buying crude, as the region is now oversupplied with crude and refined products.
A poll by Reuters of 61 economists found that economic growth in China dropped to 6.6 percent in the second quarter, the lowest level in 7 years.
Under normal conditions, this time of the year Asian refiners would have boosted utilization rates starting in July in order to meet increased demand for gasoline and diesel, which climbs in the summer season. But because of the crude acquisitions in the first quarter, there is more than enough to meet demand, which is another reason they’re cutting back on runs.
A final factor is while oil has pulled back over the last couple of months, it’s still a lot higher from February lows of just over $26 per barrel. That has shrunk margins, which is cutting back on profits for the refineries.
Together this has lowered Asian demand, with some companies in the Middle East lowering prices to generate more interest. Combined with an increase in oil rigs in the U. S., this could put pressure on oil prices going forward as shale production slowly ramps up. Consequently, the price of oil will probably remain level, and possibly test the $43 mark or lower.
Add to this the increase in oil from Nigeria, Libya and Canada, along with added supply from Iran and Saudi Arabia, and it’s setting up a scenario where supply could exceed demand once again, resulting an increase in inventory.
Asian slowdown
Most of us are aware Asia, and China in particular, has been experiencing an economic slowdown. The 6.6 percent growth rate in China may be even more optimistic than warranted, but it does confirm the growth trajectory of China is flattening, and with it the rest of Asia.
This post was published at David Stockmans Contra Corner By Gary Bourgeault via Seeking Alpha ‘ July 13, 2016.
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