Correction amid rising US stocks

Crude futures corrected, as signs of weakness multiplied across markets, as we mentioned yesterday. ICE Brent November contract fell from 80*/b to 77.7 $/b on early Wednesday, as time spreads started to correct as soon as Monday, amid rather loose fundamentals. Indeed, the API survey depicted a grim outlook for US inventories, as crude stocks built by more than 4 mb while gasoline and distillate stocks also built by 3.5 mb and 2.4 mb indicating a system-wide recovery after the Ida hurricane. Globally, kpler reported a slight global build of 4 mb, at odds with prior weeks’ draws. 

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News about the Chinese power crunch – with 17 regions curtailing industrial output due to electricity shortage amid sky-high coal prices and low hydro generation – are looking increasingly worrisome for the Chinese oil demand. About 1 mb/d of oil demand is used for industrial purposes, with refined product usage skewed towards residuals and gasoil use. INE fuel oil futures dropped by 3.7% yesterday, while Chinese crude oil futures were only dented by 2.5%. Looking at industrial output prices, Silicon iron and iron ore futures skyrocketed by respectively 4% and 2% at the close, reflecting the reduction of Chinese output rippling through the entire industrial supply chain. There is little substitution possible between oil-fired electricity generation and conventional generation as backup generators are not widespread in China, and oil-fired installed capacity is insignificant compared to coal capacity.

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