OIL MARKETS HAVE KICKED OFF TRADING IN SEPTEMBER ON A MUCH BRIGHTER NOTE

After initially rising to above $70 a barrel on Friday crude oil fell more than 1% as a weaker dollar and supply disruptions were not enough to outweigh investors' concerns about the pace of economic recovery. The US economy added 235K jobs in August of 2021, the lowest in 7 months and well below forecasts of 750K likely due to a surge in COVID-19 infections. Meanwhile, roughly 1.7 million barrels per day of oil production remain shut in the Gulf of Mexico, after Hurricane Ida damaged offshore platforms and EIA data showed US crude inventories fell for a 4th straight period. Still, on a week, crude gained 0.8% and Crude oil is expected to trade at 66.95 USD/BBL by the end of this quarter.

After recording the worst monthly loss this year in August, the oil markets have kicked off trading in September on a much brighter note on a trifecta of positive developments. Crude oil prices have been inching up after OPEC+ agreed to keep its current production agreement in place, in effect maintaining the 400K bbl/day hike scheduled for October, thus signalling that the markets are healthier than earlier feared. It has also reported that OPEC+ will raise its 2022 oil demand growth forecast to 4.2M bbl/day from its previous outlook of 3.28M bbl/day.

Meanwhile, the latest data by the Energy Information Administration (EIA) shows that U.S. crude oil inventories fell much more than expected last week despite domestic production climbing to a 15-month-high. U.S. crude stockpiles fell by 7.2M barrels to 425.4M barrels, ~6% below the five-year average. The U.S. Energy Department said on Friday it authorized the release of 300,000 barrels of crude oil from the Strategic Petroleum Reserve to help the region affected by Hurricane Ida. The Department authorized the SPR to conduct an exchange of 300,000 barrels of crude oil from the Bayou Choctaw storage site to Placid Refining Company LLC’s refinery near Baton Rouge, Louisiana, the Energy Department said in a statement.

The most encouraging piece of news yet is that crude demand in China has started showing signs of a strong recovery after the country reopened its economy and Beijing moves closer to finalizing a probe into its independent refiners, thus allowing so-called teapots to resume importing crude. Since April, weak consumption in China as well as a sharp drop in China's refining output to 14-month lows has depressed the prices of staple crude grades from West Africa and Brazil to multi-month lows. But analysts are now saying that Chinese crude importers are ramping up purchases and even paying higher premiums to secure supplies from November onwards thanks to lockdown restrictions easing.

Three months ago, in a dramatic reversal of fortunes, Beijing announced huge cutbacks in import quotas for the country's private oil refiners. China's independent refiners were awarded a combined 35.24 million tons in crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago. The big reduction came as part of a government crackdown on private Chinese refiners known as teapots, which have become increasingly dominant over the past five years. This was intended to allow Beijing to more precisely regulate the flow of foreign oil as it doubles down on malpractices such as tax evasion, fuel smuggling, and violations of environmental and emissions rules by independent refiners.

China's teapots have been steadily grabbing market share from entrenched state players such as China Petroleum and Chemical Corporation (NYSE:SNP), also known as Sinopec, and PetroChina Co. (NYSE:PTR) ever since Beijing partially liberalized its oil industry in 2015. Teapots currently control nearly 30% of China's crude refining volumes, up from ~10% in 2013.Something else working in the teapots' favor is that crude stocks by China's national oil companies are very low, and private refiners could help bridge the shortfall. Imports into China's Shandong province, home to most teapots, fell below 3 million barrels in both July and August, compared with ~3.6 million barrels on average in the first half of 2021.