Saudi Oil Flood to China Persists Despite Historic Output Cuts

Daniel Fowler
June 1, 2020

Oil prices are giving back their demand growth inspired gains as the market is concerned about rising tensions between the USA and China.

In turn, OPEC and its allies may show a greater wiliness to extend the extraordinary measures taken in April as the group pledged to reduce oil output by 9.7 mb/d in May and June, and the ongoing contraction in supply may keep oil prices afloat amid the ongoing decline in U.S. production.

The US Energy Information Administration reported a huge jump in the weekly crude oil inventory by 8 million barrels, which is the largest inventory build in four weeks. President Trump is going to have a press conference about China's new security law for Hong Kong, and oil traders are concerned that this could lead to another U.S.

"The armada of ships bringing Saudi crude to the US has arrived", said Amrita Sen, a director at Energy Aspects, a consultancy. Local tank farms have spare capacity to store up to an extra 25 million barrels if needed.

U.S. crude inventories jumped 7928K in the week ending May 22 after contracting 4982K the week prior, and the slowdown in energy consumption looks poised to persist as OPEC's Monthly Oil Market Report (MOMR) states that "in 2020, world oil demand growth isadjusted lower by 2.23 mb/d and is now forecast to drop by 9.07 mb/d". "But we'll be showing the photographs for years".

Demand is rising, and production is falling, but China might be the fly in the oil market ointment. The US' crude oil output reached an all-time high of 13.1 million bpd for the week ending February 28.

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Data from oil analytics firm Kpler showed that floating storage volumes in Chinese waters came off a peak of 35.4 million barrels on May 23 to 29.4 million barrels as of May 26.

WTI recorded an all-time monthly rise of 88% after trading negative last month.

Saudi flows to the Asian nation were about 2.1 million barrels a day through May 28 - a figure that may rise in the coming days - tanker-tracking and fixture data show.

Saudi imports "are likely to remain high in the next few weeks but they will fall sharply from mid-June", as the OPEC cuts take effect, said Sen.

"Capitalism is buying cheap crude from the lowest-cost seller", said Book.

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