China’s Third Plenum to boost oil markets in coming weeks. - Rystad Energy's Oil Macro Market Update

China’s Third Plenum to boost oil markets in coming weeks.

Here is Rystad Energy’s oil macro update from Senior Oil Analyst Svetlana Tretyakova:

“With the market balances remaining tight and prices still closely reflecting current S&D fundamentals.
Any announcement from the Third Plenum in Beijing this week is likely to shape the market sentiment due to the size and importance of China’s oil demand growth.”

Initially driven by concerns over Hurricane Beryl's potential impact on oil installations in the US Gulf of Mexico (GoM) and refineries along the Texas coastline, prices declined before seeing a second consecutive rise last week.

This increase was supported by an unexpected slowdown in US inflation, based on latest data, which has raised expectations of cuts in benchmark lending rates by the Federal Reserve.

Even as the International Energy Agency (IEA) highlighted concerns over global oil demand in its latest report, oil markets will focus on the key announcements by the Third Plenum in Beijing: a strong policy push toward supporting the economy, including the struggling real estate sector, would set a bullish tone for the next few weeks.

Alternatively, lack of economic support, would be read as a bearish scenario for the oil markets.

In US macroeconomic trends, inflation eased to a 3% annual increase in June due to lower gasoline prices, marking the third consecutive month of deceleration.

The latest reading revived speculation of early rate cuts by the central bank to support the nation’s economic recovery, despite challenges in sectors like housing and food.

Following the consumer price index (CPI) release, the US government debt market rallied, pushing 2- and 10-year treasury yields to four-month lows, reflecting market confidence of upcoming rate cuts.

Still, the optimism was tempered by producer price index (PPI) data showing a higher-than-expected gain, signaling ongoing inflationary pressures affecting businesses and consumers.

China presented less optimistic macroeconomic signals that counterbalanced the oil market dynamics.
Consumer inflation remained subdued in June, with the CPI posting a below-expectations rise of only 0.2% year over year.

Factory-gate prices continued to decline for the 21st consecutive month, reflecting weak demand despite government efforts to stimulate consumption.

Core consumer inflation showed a slight increase, while food prices declined significantly.

Additionally, China's economy grew 4.7% in Q2 2024, falling short of the expected 5.1%, adding pressure for more stimulus measures.

These indicators underscore the need for structural reforms to strengthen household spending and ensure sustained long-term economic growth in China.

Despite these economic challenges, China's ongoing summer holiday season has notably bolstered road and aviation traffic.

Road traffic levels have remained relatively stable compared to 2019, while aviation trends show a clear upward trajectory.

As a result, our outlook for oil demand in China remains positive, with anticipated contributions of approximately 560,000 barrels per day (bpd), representing nearly 50% of global demand growth.China’s Third Plenum to boost oil markets in coming weeks.

Here is Rystad Energy’s oil macro update from Senior Oil Analyst Svetlana Tretyakova:

“With the market balances remaining tight and prices still closely reflecting current S&D fundamentals.
Any announcement from the Third Plenum in Beijing this week is likely to shape the market sentiment due to the size and importance of China’s oil demand growth.”

Initially driven by concerns over Hurricane Beryl's potential impact on oil installations in the US Gulf of Mexico (GoM) and refineries along the Texas coastline, prices declined before seeing a second consecutive rise last week.

This increase was supported by an unexpected slowdown in US inflation, based on latest data, which has raised expectations of cuts in benchmark lending rates by the Federal Reserve.

Even as the International Energy Agency (IEA) highlighted concerns over global oil demand in its latest report, oil markets will focus on the key announcements by the Third Plenum in Beijing: a strong policy push toward supporting the economy, including the struggling real estate sector, would set a bullish tone for the next few weeks.

Alternatively, lack of economic support, would be read as a bearish scenario for the oil markets.

In US macroeconomic trends, inflation eased to a 3% annual increase in June due to lower gasoline prices, marking the third consecutive month of deceleration.

The latest reading revived speculation of early rate cuts by the central bank to support the nation’s economic recovery, despite challenges in sectors like housing and food.

Following the consumer price index (CPI) release, the US government debt market rallied, pushing 2- and 10-year treasury yields to four-month lows, reflecting market confidence of upcoming rate cuts.

Still, the optimism was tempered by producer price index (PPI) data showing a higher-than-expected gain, signaling ongoing inflationary pressures affecting businesses and consumers.

China presented less optimistic macroeconomic signals that counterbalanced the oil market dynamics. Consumer inflation remained subdued in June, with the CPI posting a below-expectations rise of only 0.2% year over year.

Factory-gate prices continued to decline for the 21st consecutive month, reflecting weak demand despite government efforts to stimulate consumption.

Core consumer inflation showed a slight increase, while food prices declined significantly.

Additionally, China's economy grew 4.7% in Q2 2024, falling short of the expected 5.1%, adding pressure for more stimulus measures.

These indicators underscore the need for structural reforms to strengthen household spending and ensure sustained long-term economic growth in China.

Despite these economic challenges, China's ongoing summer holiday season has notably bolstered road and aviation traffic.

Road traffic levels have remained relatively stable compared to 2019, while aviation trends show a clear upward trajectory.

As a result, our outlook for oil demand in China remains positive, with anticipated contributions of approximately 560,000 barrels per day (bpd), representing nearly 50% of global demand growth.

Additionally, Saudi Arabia plans to increase crude oil exports to China in September.

This follows price cuts by Saudi Aramco aimed at boosting demand in China, its largest market.

On supply, Canada's oil production was stable at 4.5 million bpd in the first half of 2024 and is expected to increase by 260,000 bpd in the second half despite maintenance.

Residual fuel strength will likely support medium-heavy crude margins, stabilizing prices.

Shipments to Asia—China and India—as a result of the Trans Mountain pipeline expansion began in June and reached 210,000 bpd.

Potential wildfires in Alberta and US Gulf coast hurricanes could threaten production and demand in the next few months.

Rystad Energy estimates 990,000 bpd of marketable output could be at risk from Alberta wildfires as of 16 July.

Turning to political developments, the assassination attempt on former President and presumptive Republican nominee Donald Trump did not lead to political instability in the US or globally, at least not yet.

Despite the potential for huge disruption, oil markets were not impacted for several reasons.

First, Trump was left with only minor injuries and bent on continuing his presidential campaign. 

Second, the attempt occurred when the markets were closed and was resolved quickly.

Crucially, Trump is set to accept the Republican nomination this week.

Masoud Pezeshkian, a reformist, narrowly won Iran's presidential election amid low voter turnout, signaling public discontent with conservative policies and a desire for change.

Even so, his ability to implement significant reforms is constrained by Iran's theocratic system, where ultimate authority rests with Supreme Leader Ayatollah Ali Khamenei.

While Pezeshkian may enact limited social reforms and pursue economic improvements, substantial changes in foreign policy or improved governance are unlikely.

His presidency may offer short-term benefits to Iranians but is unlikely to bring about systemic long-term changes.

Looking ahead, key economic reports expected next week could influence oil demand projections.

The Third Plenum of China’s Communist Party, scheduled from 15 to 18 July, is pivotal not just for China’s economic path but also for global markets.

Key focus areas include achieving a 5% growth target by enhancing economic confidence through fiscal reforms, restructuring central and local government spending, stabilizing the real estate market amid a downturn and promoting high-tech and green industries.

The plenum aims to tackle demographic shifts, bolster economic confidence and reaffirm China’s commitment to economic openness.

These reforms are expected to positively impact China’s economic performance in the second half of the year compared to the first half.

Read the latest issue of the OGV Energy magazine HERE