China Played The Oil Market But They Are Back
Last week's oil trading had everyone confused. On Friday, I was so confused as to write a lengthy write-up on how the market could be wrong given the sell-off but true to my words, I resisted my biases and waited for more data. Over the weekend, we had some encouraging news happen:
Mobility data strengthens the case that China's demand rebound is real.
Saudi Aramco raised its official selling price to Asia when the market expected a cut (positive signal).
On Friday, we also noted something interesting. Brent 1-2 timespread was up despite flat prices selling off materially. This was the first time this has happened since early October. Fast forwarding to today, Brent 1-2 timespread continues to pick up and there are other signals we are seeing that suggest China is back in the oil market.
Hindsight is always 20/20 and given everything we have now, we believe this is what happened with the oil market last week.
Like us, many of the oil traders anticipated a material pick-up in demand from China in early February. Readers will note that we said the best and most clear signal on a China demand rebound will be early February oil trading. In the physical oil market, we are now trading April barrels, which means that we can see how Q2 balances will shape up.
As a result, traders and quants bought up oil futures in anticipation of the inevitable return from Chinese oil traders. But when February rolled around and there were no signs of them returning, traders dumped their positions, and in turn, this resulted in a cascading sell-off. But towards the end of the week, the signals started to flip.