Listen: China's slowing economy spells a downturn for US crude exports

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Jeff Mower:

Hello and welcome to the Platts Oil Markets Podcast by S&P Global Commodity Insights. Today we will be discussing the impact of slower Chinese economic growth on US crude exports, as well as the wider oil market.

I'm Jeff Mower, director of Americas oil news, and with me today is Platts US crude market editor Laura Huchzermeyer, Commodity Insights analyst Ian Stewart, and oil futures editor Chris Van Moessner. China's economic slowdown has cut into US crude exports, and this put downward pressure on crude futures balancing out the more bullish impacts of the ongoing war between Israel and Hamas. Events that in the past might have shocked crude prices higher such as Iran's recent promise to retaliate against the killing of a Hamas leader in Tehran by Israel have been cushioned by an expected supply surplus stemming from China's slower buying. As a result, crude futures have been somewhat range bound. However, some volatility has been seen in spot crude markets where the impacts of prompt buying trends are more keenly felt. So Laura, let's start with you. What sort of impact are you seeing in US spot crude markets from the lower Chinese pie?

Laura Huchzermeyer:

Yeah, thanks Jeff. It's been quite an interesting summer for physical crude on the Gulf Coast, notably the sour market and especially Mars crude. These crates are produced offshore in the Gulf of Mexico and we saw a really sharp drop off for front month Mars, particularly in July. We saw it hit a year low average and was trading in the negative $2 and 40 cents per barrel range. That's quite a big move weaker. In July, we'd been hearing a lot about some failed cargoes specifically for sour crude exports on the Gulf Coast. Someone had been looking to buy sour crude on the Gulf Coast and for whatever reason chose not to fulfill that cargo, and so that added back to the supply on the Gulf Coast pressuring those differentials a lot weaker.I think we've been seeing a lot of impact for sour crudes, especially as Chinese refineries have sharply cut their crude processing rates in response to weak fuel demand.

We're seeing a lot of that in the sour market as Asia and the refineries there tend to be the buyers of sour crude grades. On the other hand, we're seeing a bit of a mix for WTI Midland and exports of light sweet crude on the Gulf Coast. Definitely we see it, and we see it in the value when China steps back or stops buying. But usually, at the same time, other countries and other refineries around the world will step in where maybe China has stepped back. We'll start seeing buyers in India for example, or South Korea, that they become the more active buyers when those prices get low enough when China decides to buy something else or don't buy at all.

Jeff Mower:

Yeah, sure. And have you seen, has there been much of an impact on Mars from the Transmountain expansion? So when that pipeline was expanded from the west coast of Canada, now more of that crude is heading to China?

Laura Huchzermeyer:

Yeah, sure. I think soft Asia demand is just one piece of the puzzle impacting prices on the Gulf Coast. Exports often serve as a release valve for the domestic supply, meaning when production is high or just chugging along as normal and domestic buyers get their fill, exports can alleviate any of that supply buildup by allowing for more exports. But when international buyers aren't there, or opting to buy some other crude, maybe in this sense it's Canadian crude, that can pressure Gulf Coast prices lower. We're still learning and seeing what all the impacts are of the Transmountain expansion, which is basically getting more crude onto the west coast of Canada. But we would expect many of those cargoes are going to Asia and so the buyers there maybe opting to buy the cheaper, heavier, more sour Canadian crude, which is readily available on the west coast. It's a shorter distance to get it to Asia from the west coast of Canada as opposed to the US Gulf Coast. We're probably going to see a dip in exports, especially in sour grades from the Gulf Coast.

Jeff Mower:

Yeah. Yeah, I thought it was interesting when you mentioned the TI. I saw a story we ran the other day on WTI Midland, and even though Midland prices, I know we were talking earlier today, even though Midland prices and/or MEH prices, whatever want to call it, WII, MEH on the Gulf, or Midland, those prices have been stable, but the Midland price in Rotterdam, delivered into Rotterdam, that price has skyrocketed. It's now something like $3 and 20 cents over dated brand. So yeah, there's still plenty of, it seems like plenty of demand in northwestern Europe for that crude. And so Chris, you wrote a piece recently about the weekly export trends. What can you tell us about what you're seeing there, but more specifically about the arbitrage economics?

Chris van Moessner:

Sure, thanks Jeff. Broad strokes, we've seen a pretty significant deterioration in the arbitrage economics for exports toward China. As Laura said, the arb has been pretty much closed since May. There's a brief uptick in July, but it hasn't been broadly positive since the springtime. And as we reflected in the flows, to date in August, we've seen I think zero loadings for China-bound cargoes. Overall US exports in the first half of August have been below 4 million barrels per day due on large part to these reduced flows toward Asia.

But as you said, the trans-Atlantic arb is open and has been supporting exports overall. In general, what we've seen so far this summer is pretty steady US refinery demand, meaning that the slowdown in exports hasn't been necessarily reflected in US inventories. We've still seen more or less steady seasonal draws this summer, but Labor Day is only two weeks away. The summer driving season is almost over, and we've already seen inklings of refiners talking about run cuts into the third quarter. So that math could change, and all of a sudden these slower exports you could start seeing be reflected as inventory builds in the US.

Jeff Mower:

Oh, sure. As far as the broader market is concerned, the broader futures market, what sort of economic indicators out of China have helped paint this more bearish picture lately?

Chris van Moessner:

In general, you're just seeing slower GDP growth across China. Second quarter GDP growth was 4.7%, that's down from 5.3 in the first quarter. You've just seen every, month after month, quarter after quarter these bearish revisions to the downside for the demand growth outlooks in China. A lot of the growth is in the services sector, which is less energy intensive.

Jeff Mower:

It's all industrial production, still up. It was still up in July 5.1%, but that was down. It was slowing down from 5.3%. I saw interesting story today too, and this is something we ran, China's domestic steel demand has been falling rapidly to your point about industry. In July, it declined 12.5% on the year. Yeah, so I thought that was pretty interesting, their consumption in July was down 11% from June. Ian, you had mentioned China's manufacturing PMI in a report recently. Why is that data point relevant for oil demand and prices?

Ian Stewart:

Sure thing, I'll get there, but I do, I want to take a step back.

Jeff Mower:

Sure.

Ian Stewart:

And pick up on something that Laura mentioned just because you've been watching the global crude market, OPEC cuts since 2022 have created relatively strong values for the sour crudes, your Mars, your Gulf Coast crude. But like Laura said, suddenly that flipped to a discount, and that coincides with what we've seen on the Chinese crude import numbers, which have been down on the year. That's year to date, January through August. And lower Chinese crude imports is an anomaly. If you exclude distortions from the pandemic years, 2020 to roughly the end of 2022, Chinese crude imports have never fallen on year since 2000. This theme of weaker, softer Chinese demand growth, softer Chinese crude imports, you see it in the refinery runs as well, has really come to dominate, a dominant theme in today's market.

Of course, China in all the models, it never declines, it always grows. We're waiting for this pass. We're looking for signs that the weakness is troughing, or that the trends are going to reverse. One place we look is in PMIs because that industrial manufacturing indicator correlates well with diesel demand. It's in contraction, it's been in shallow growth in most of the year. And the other place we look is in the independent refinery cracks because these plants have new access to export markets for their fuel and these cracks are barely trending positive and moving negative some months. So again there, we don't really see that imminent vast in the domestic picture.

Jeff Mower:

Can you say, you've revised your Chinese demand growth figures lower I take it?

Ian Stewart:

S&P Global has been in the process of gradual data revisions to Chinese demand growth. Off the top of my head, I think we're around 400,000 barrels per day.

Jeff Mower:

Are you still expecting a recovery later this year?

Ian Stewart:

Yeah. We're expecting a bounce in crude imports. We're expecting demand growth, pick back up. But again, a lot of the early indicators we look to for trend reversal are not showing us the way.

Jeff Mower:

Yeah, that's what I was wondering. What do you think will spur that? What will spark that demand growth, that recovery?

Ian Stewart:

There's been a focus on exports in China to reboot GDP, reboot the economic outlook, but it seems hard to offset the sluggishness in construction and real estate.

Jeff Mower:

Sure. So I want to shift to something more bullish, which is the ongoing Israel Hamas war. I guess my question, I'm going to open this up to you, how much risk, we're talking about futures more specifically, how much risk of this war spreading do you think is baked into the market? And I know it's probably really hard to answer, maybe it's all unfair, but maybe have the recent ceasefire negotiations, have they had any sort of bearish impact? Chris, what do you think?

Chris van Moessner:

Yeah, so we've definitely seen the market has rolled on and off these Mid East war risk premiums throughout the year. The most recent round of ceasefire negotiations seemed to have really cooled concerns about an imminent broader conflict. But the risk is still out there in terms of what it means for broader supply. There's a lot of uncertainty, there's significant risks obviously in terms of just the question mark and what a broader war would mean. But in terms of long-term structural changes, there seems to be so much slack in supply that it doesn't seem to, a war would have a major long-term applications for future prices at least.

Yeah, it's something market's been dealing with all year. If you wanted to try to put a number on it, we would look back to this trough in futures prices in early August, which was this macro driven event, everything fell that day. Between that and the top of last week, that's $7, and we've given roughly half of that back during this prolonged negotiation this week. Our team, we don't really see any near term resolution. We know, starting to see a solution in negotiations, but we also think that the more this drags on with high levels of spare capacity, sufficient inventory buffers, that this risk, it's discounted until supplies is drawn into the lines of fire.

Jeff Mower:

Yeah, I think it's worth pointing out, I know Chris, we were talking about this a while ago. Some of these events are more bearish lately for crude, but the market's still in backwardation. It's maybe not super steep, that backwardation is narrow, but it doesn't point to a completely sloppy market. I think the front 12-month strip on NYMEX was something like $4 and 40 cents yesterday. That was on August 19th, that's down from $8 or something maybe a month ago. So I don't know, something to just putting into perspective, I suppose.

Chris van Moessner:

Yeah, I mean, and when we're talking about this slow down in China, demand unprecedented market changes, I think it's also important, as you said, for perspective, a second quarter GDP growth of 4.7% is nothing to sneeze at. These slowdowns are really at the margins. That's important for markets, but it's also, no one's seeing a negative GDP print coming out of China anytime soon. There's lots of slack in global supply, but there's also a lot of demand out there. It may not be growing as fast as estimates from earlier this year, but it's still growing.

Jeff Mower:

Fair enough. Well, I'll open it up to everyone here. What other downside or upside risk do you see, or any takeaways, any recent events that you want to point out that we're missing here?

Laura Huchzermeyer:

I think really one of the biggest things, especially for light sweet crude exports on the Gulf Coast has been a very narrow Brent WTI spread this summer. We've been seeing less than $4 per barrel between those two big benchmarks. When it's narrower than $4, it really makes exports particularly difficult. In efforts to get the exports to happen, you're going to really have to start seeing, especially WTI at the Magellan East Houston terminal, those differentials will start coming down to bend and flex with the market.

When Brent WTI is particularly narrow, like Ian said, we're still seeing it. And like Chris said, we're seeing a lot of demand around the world and WTI Midland particularly goes to Europe, and it's part of the Dated Brent Benchmark there and we've been seeing a lot of demand in that market with prices for WTI Midland on a delivered basis getting quite a bit stronger. But on the flip side of that, on the Gulf Coast, because those prices that is selling into Europe, the differential at the pipeline terminal and at the Gulf Coast has to move, and they have to usually get weaker when we see Brent WTI so narrow.

Jeff Mower:

How about Chris?

Chris van Moessner:

Well, one thing we haven't touched on too much is the deal for the US demand. The US economy has been a pretty big bright spot relative to the rest of the world, and last month we had a shaky jobs report. It set off a bit of a sell off across markets and maybe a road to some of that confidence. In terms of risk to the downside, US gasoline demand has been right around a five-year average so far this summer. Refinery demand has been about there too. Going into the fall, we're into the teeth of hurricane season, which has always presents risks, so far we've been pretty lucky in terms of land strikes for hurricanes. And then just in for the broader economy, the Federal Reserve, the market's down pricing in the full point of easing by the end of the year for the Federal Reserve interest rates, which essentially should be bullish for prices, but at the same time, they'll only be easing if they're seeing broader slowdowns in the economy. So where that balances out could significantly pivot the outlooks going forward.

Laura Huchzermeyer:

One thing that I haven't really mentioned so far is the buyback for the Strategic Petroleum Reserve. The US government has been buying back this year and it has added to the amount of barrels that they're going to be buying back into 2025. That should be on paper bullish for sour crudes, especially on the Gulf Coast. But it's like the market has barely even reacted to those announcements and the announcements that the government is going to be buying back more to refill the SPR because of everything else that's going on in the market, those SPR buybacks have just been a blip almost this summer.

Jeff Mower:

Oh, fair enough. And Ian?

Ian Stewart:

I'd have to mention the market anticipation around the return of OPEC plus volumes, if they do indeed decide to lead full production increases. They're supposed to start in October. Cumulatively through the fourth quarter, that would add 540,000 barrels for day to production. From a logistics point of view, those volumes have to start being nominated in next few weeks. I think the market is bracing for additional volumes unless they make a policy U-turn here, but they're going to have to do it pretty quick and I think that's the next state that the market wants to see.

Jeff Mower:

All right. Well, I'll leave it at that. Thank you Laura, Ian, and Chris for joining me, and thanks again to our listeners for tuning into this episode of the Platts Oil Markets Podcast. This Oil Markets episode was produced by Jennifer Pedrick in Houston.