These Are The Key Drivers For The Oil Market
In our view, these are the most important key drivers of the oil market:
China's oil demand.
OECD oil demand.
OPEC+ supplies to the market (OPEC+ crude exports).
Russian crude exports (whether sanctions are impacting).
US oil production.
China's Oil Demand
China's zero COVID policy has really thrown a wrench into the oil market recovery. When China instituted lockdowns back in March/April, implied oil demand for China dropped by ~2 million b/d. This was reflected in China's onshore crude storage increase (satellite data).
Since then, we have seen a gradual recovery in China's oil demand. How do we know that? Well, for starters, China's onshore crude inventories declined by ~31 million bbls in July.
The reasoning for the decline was that China's crude imports were very low, and combined with higher demand, inventories declined.
As you can see, China's seaborne crude imports fell to just ~8 million b/d. Judging by the latest implied demand figures from the July data, we suspect China would need to ramp up crude imports to ~9 million b/d just to ensure crude inventories remain flat.
One could argue, however, that given China's bloated crude inventories, it can hold off on purchasing additional crude on the open market. This is a valid concern, but we know that this is unsustainable.
Another indicator we use, West African Crude Spread, is pointing to us that China has returned to the market in a very meaningful way.
This in combination with the fact that the Brent 1-2 timespread closed at nearly $5/bbl indicates to us that China's demand is back and will likely improve going forward.
If China's oil demand is expected to rebound meaningfully into year-end, this bodes very well for oil prices. For starters, China is the largest crude importer in the world, so given its swing buyer status, what China does has a huge influence on how oil trades. And as you can see from the China crude import chart, China has actually been holding off from buying since March 2022. This means that once China returns in a meaningful way, we could see crude rally back into the $110-$120 range (assuming OECD demand cooperates, more on that later).
This variable was a key headwind for most of the year, but this appears to be changing.