Decline of activity in China

The price of Brent 1st-nearby, which had risen to almost $115/b yesterday, has since fallen back below $110/b, after even falling below $108/b. Yesterday’s rebound was due to a decline in optimism about the possibility of a ceasefire in Ukraine. Three factors contributed to the decline. First, the news that the Biden Administration is set to announce today a massive drawdown of US strategic oil reserves: 1m/d for several months, or 180mb or almost 1/3 of the already much reduced US reserves. The announcement would be made today probably in cooperation with allied states. Secondly, China’s PMIs fell below 50 in March, confirming fears of a sharp slowdown in activity as a result of anti-Covid measures (see Daily Eco) and slowing oil demand. Finally, the US inventory report was quite bearish yesterday, despite the decline in crude stocks. In particular, production has finally picked up and gasoline demand has slowed, which is unusual for this time of year and is probably a consequence of higher pump prices. More details here.

OPEC is meeting today and there is virtually no chance that an acceleration of the production increase will be agreed. It is no coincidence that the announcement on US strategic reserves will be made around the same time. OPEC analysts have significantly revised down their Q1 oil market surplus estimates: in 2 months, it has been lowered from 1.4mb/d to 0.6mb/d. This may not be the end of the story, as the IEA estimates that the market was still in an oil deficit. OPEC, on the other hand, has revised its Q2 surplus forecast sharply upwards, thus justifying in advance its decision not to put too much oil on the market.

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