China Oil Demand Peaked?

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Is China’s Demand for Oil Nearing Its Peak?

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Michael Tanner: [00:00:10] What’s going on, everybody? Welcome into the Monday, August 26th, 2024 edition of the Daily Energy News Beat stand up. Here are today’s top headlines. First up is China’s demand for oil nearing its peak. Super interesting article by friend of the show, Irina Slav. Next up, tell Renee in moving forward with driftwood LNG work finally in the news segment why OPEC can’t afford to reverse its oil OPEC cut. Super interesting article over there at our friends at oil price.com. I will then jump over and quickly cover what happened with oil prices and rig counts on Friday. Looks like the market after you know fed pilot Jackson Hole came out and had some pretty a bullish stuff seems to have been a bump to prices. I will cover all that and a bag of chips guys. As always I am Michael Tanner. Stew is out on assignment so I am here rocking a solo show. Let’s go ahead and get kick it off. All right. [00:01:08][58.0]

Michael Tanner: [00:01:08] First one I want to cover here is China’s demand for oil nearing its peak. This is pretty interesting from the standpoint of there’s kind of two competing camps. So you’ve got the camps that could care less about China saying that their demand is not necessarily influential as much as it used to be. On where oil prices are going. You’ve got another camp that is absolutely, extremely worried about what China is doing. And Irina Slav over at Oilprice.com, breaks down what I think is a really good look at, well, what if China’s oil demand is peaking? If you fall in the camp of, hey, China and their demand of, you know, for all types of refined products, not just crude oil, but all different types of growth, if you believe that’s critical to where oil prices will go, I tend to fall in that camp. I’m probably somewhere in the middle, but we could be a point where China’s oil demand may have peaked. And I think this is a great article that kind of lays out the case for that. So kind of the top three headlines here. China’s oil imports in July were down 12% from June and 3% from July of 2023, which kind of raises those concerns mainly about the economic health of that. There’s a couple factors that they claim are going into that the rise of EVs, the shift to LNG in trucks, which I think is probably the head the biggest one out of all these. And then finally, a slowdown in manufacturing in real estate, or kind of the three big buckets that are contributing to this trend. You know, there are some analysts, again, on one side saying that this slowdown is temporary, while others are arguing that China’s oil demand actually may have already pink, which clearly is going to have significant implications for the overall global oil markets. It’s it’s pretty interesting. So there’s a there’s a couple things here. Obviously, as I just mentioned in July, China imported about 12% less oil than it did in June. And in June of 2024, that was 3% less than it was a year ago, which is which is pretty interesting. And this coincided with a fall in prices. So you can definitely see how there’s some correlation there. Another interesting note is that India in July passed China as the biggest buyer of sanctioned Russian crude at a rate close to 2.1 million barrels per day, which represents a 4.2 monthly increase and about a 12% annual increase. You know, the other second or the third bucket that’s talked about will kind of skip around. Obviously, we talked about and we just covered, you know, the actual import of crude oil. But in the manufacturing real estate, we all know China is going through an extremely rough real estate and manufacturing growth, if only because we saw with with Evergrande in the bank situation going on there, hundreds of billions of dollars in loans, you know, out to a place where, well, we may or may not have people to live there. It’s in a precarious position. Not that they’re going through their own version of our 2008 financial crisis, but it could be getting there. And then this is something that our good friends over at routers, Clyde Russell, he actually posed this question of, well, has China oil demand not already peaked? You know, his big notice was that China’s record import rate for crude oil last year and the perception that and I’m going to read straight from the article and the perception that most analysts and traders appear to believe that this year’s slowdown is temporary. The question I’m asking is, what if it isn’t super interesting? So, Russell, go ahead and points out that for the last 19 years, China oil imports have been basically on a straight upward trajectory before obviously dropping in 2020 and 2021 due to the pandemic, but picking up basically in 2022 and in 2023, reach an all time high of about 11.3 million barrels per day last year. If you’re a China oil bull, that was all the info you need to say, hey, we’re back, baby! But we’re seeing a drop off this year. And so the real question is, okay, is it going to come back again? There’s the EV story, which I, I don’t see EVs is being like the largest reason why their oil demand is struggling. Obviously. You know, if you’re moving to an electric SUV to electric vehicle, you’re getting your you’re getting your power. Via electricity. A lot of that is either coal or natural gas. So yes, obviously oil demand could drop a little bit from that. I think the biggest thing that we talked to that people aren’t talking about, which this article brings up, is the replacement of diesel with liquefied natural gas in trucks, most things  around the country, if you ever driven on a highway not just in China, but in the United States, it’s all trucks. And if those are going to be moving towards LNG, that’s a large factor of kind of that’s a huge chunk of the overall quote unquote, gasoline demand that’s now shifting to natural gas. And, you know, as we know, there’s plenty natural gas to go around. So the incentive is there to do that. Again. You we’ve got the manufacturing in real estate stuff. You know, basically with this you know what I Reena finishes up by saying is what I’ll read from the article. What this means is that China may not return to its path of ever consuming growth volumes of crude. To be fair, however, it was unrealistic to expect it would. China relies on imports for close to 60% of its consumption, and China does and doesn’t like to rely on imports so much so it makes sense to do everything to reduce this dependency by encouraging alternative energy sources. In other words, China’s peak oil demand may be here, or it may be around the corner, but it’s only a matter of time before that peak oil comes. The sooner the market adjusts, the sooner it should start paying attention to other factors determining global oil prices, such as supply, which we’ll cover in the next article. But if you fall in the camp of where China oil demand is a main driver of prices, well, buckle up because it could get crazy. I want to stick on the LNG theme. [00:06:41][333.5]

Michael Tanner: [00:06:41] Let’s come back here at home. Tellurian is moving forward with the driftwood LNG project. If you guys don’t know, this, driftwood LNG was kind of one of the last projects approved before the Biden administration kind of shut that down. Obviously, that has been reversed a little bit, but they’ve gone ahead and and issued a limited notice to proceed in line TP to multiple engineering and construction firms, specifically natural to go ahead and begin work. This is first phase. They’re going to build two different LNG plants near Lake Charles, Louisiana with an export capacity of up to 11. I don’t know how to add Mtpa. It’s it’s a big number, folks. Full project will include five plants with about 27.6 mtpa. They filed an amendment in July of 2024 with Ferc that they’re gonna go ahead and continue and move on to that phase two here quickly in August, the project’s going to go ahead and, and and beef up those side roads and drainage efforts and hopefully complete the piling in the LNG sump area. Then they’ll go ahead and get working on plant two. If you’re a finance guy like myself, you you’ll remember there are the large Australian LNG player. Woodside announced in late July that it was actually going to go ahead and buy two Iranian. They paid about $900 million, or about a dollar per share of outstanding stock, which had an implied enterprise value of somewhere about 1.2 million. As part of that agreement, they also provide a bridge loan total Iranian of up to $230 million to ensure that the activity at driftwood would continue, go forward and maintain, quote unquote, momentum prior to the completion of the transaction. Here’s the quote. Woodside is targeting FID readiness for phase one of the driftwood LNG development opportunity from first quarter 2025 that was approved by both board of directors. So LNG continues to be a big push. And going back to we talked about China. I think you’re going to see some of that LNG technology and shift of trucks to from, you know, diesel into LNG. You’re going to start seeing that here. You already see that. I mean, you have any Amazon truck driving around that’s, you know, that’s all LNG or electricity. I think it’s Rivian I think I saw on the side powered by Rivian at somebody buying Rivian stuff because we know that they they’ve had an absolutely tough time. I think the push into LNG is going to continue. You see that by the big Australian companies coming in. I think it’s a little bit you know, part of the reason why I think we’ve seen LNG and natural gas prices drop. Mainly it’s because now you can keep building this. Obviously it’s a huge CapEx problem. You had to come up with billions and billions of dollars to actually build these things. So just to say, oh, the by the bands up now they’re going to start popping up everywhere. It’s not quite that easy, mainly due to the fact that there’s huge amounts of capital required to do this. I do I do see it interesting though that about, you know, back when this ban was in place, I think earlier in the year, you and I were talking and there was a lot of different articles being dropped about Saudi Aramco and the, you know, Saudi looking at buying U.S. LNG facilities, mainly because if you if you can’t build new ones, the ones that are already in existence are permitted are extremely more valuable. Well, since this ban has been reversed, you haven’t really heard that any more because I think, again, they’re saying, well, why do we need to go to a place where that those LNG prices are going to continue to drop when we can do a lot and spend a lot of that money here at home. So I think it’s super interesting. LNG dynamics are going to continue to play a large role here, and we’ll keep on covering that. [00:10:05][203.9]

Michael Tanner: [00:10:06] Let’s move on here. Why OPEC can’t afford to. Reverse oil output cut. Super super interesting article. Basically talking about how OPEC has an inability or arguing that OPEC has an inability to reverse its oil output cuts. I’ll kind of read the top three bullet points here. Basically they’re saying that OPEC and does not have the ability to reverse its oil output, mainly due to the fact of rising oil production here in the United States, Guyana and Brazil. The EIA forecasts that global oil supply will fall short of demand in the second half of 2024. Further complicates OPEC’s decision. And despite what the market believes will happen, which is a cut reversal, OPEC may need to maintain its current production levels to balance market share and keep oil price stability. We all know that Saudi really needs prices on the higher end to fund their transition away from oil. It’s really a catch 22. They need oil prices as high as they can’t get off of oil. This was an option made by BP’s chief economist, Spencer Dale, who said some super interesting things. Let me go and pull up his quote here. Basically he he mentions that the increase in Guyana. So this is what he’s saying is BP doesn’t have any stake in Guyana. He says that, you know, quote, expanding its production rather than consistent over the past few years. It’s still it’s still a bears noting that it started back in 0 in 2019, reaching a production rate of 600,000 barrels per day this year as Exxon ramped up its Stabroek block. He also noted that the EIA forecast, in its latest short term energy outlook, stated that Guyana’s output will further rise to over 800,000 barrels per day next year. It’s pretty crazy. He also talks about the declining impact or the declining volume of global oil inventories, and he mentions that the EIA recently forecasted that supply will fall short of demand by some 500 or 750,000 barrels per day, which was an upward revision, if you remember, from the earlier projection of about 500,000. So now you’re seeing a larger gap occur there. I think this is a super interesting kind of counter look at. I think a lot of what the market is signaling is that, hey, we’re going to see a reversal of these cuts because OPEC needs to put these barrels on the market because eventually they need to make money. Yes. Lower oil prices means you’re increasing revenue. But if that if you’re cutting oil to do that, there’s a balance point where you cut too much, your overall revenue volume shrink, even though you’re getting a higher price. And then the opposite can happen. You know, I was talking with some of my friends in the industry. They were at an event down in Houston last week. And, you know, that day that the the US national security state. I’ll say that I know it was some people from the NSA and the CIA were actually talking about how they’re in full belief that OPEC is actually going to reverse their cuts and start flooding oil with the market. They mainly say that because they need to get oil out of their inventories, they are seeing rising inventories, which I find interesting. And the thought is if there is that gap in the market, they’ll be able to fill that and prices won’t fall too much. I think the problem is every other OPEC nation is going to be able to see that it’s not just Saudi that plays into that. Now, we do know that these other countries in OPEC aren’t necessarily following their their their output quotas. They’re definitely producing more. We always you know we talk about the Black Fleet or the Dark Fleet all that jazz. This definitely plays into that. I don’t know where I fall on this. I think there’s there’s arguments on both sides. I would I would tend to fall on the camp that I don’t think OPEC can reverse their oil cuts. I would tend to agree with the points in this article, mainly because their goal is to transition and are spending massively to transition away from oil and gas, and the only way to do that is to have a higher oil price. So if they need to keep cutting slightly to support Brant Oil, which right now is will cover, I mean is just below $80. They need to like 95 or 100 to really balance their budgets. Obviously they have deep, deep coffers. So it’s not a too big of a deal right now. But they really are hoping for this to rise. It’s going to be very interesting. I think as we get closer and closer to the election, things are going to get spicier and spicier and we’ll see where we end up at the end of the year. [00:14:07][241.5]

Michael Tanner: [00:14:08] Let’s go ahead and jump over to the finance side, guys, before we do that. As always, the news and analysis you just heard is brought to you by the world’s greatest website, www.energy newsbeat.com. The best place for all your energy and oil and gas news doing the team do a tremendous job making sure that website stays up to speed. Everything you need to know could be the tip of the spear when it comes to the energy and the oil and gas business. You can go ahead and check out our Substack [email protected]. You also hit the description below for all the links to the timestamps, links to the articles and all of our other resources. [00:14:39][30.9]

Michael Tanner: [00:14:40] And the overall markets on Friday. Pretty interesting. I mean, we are up about 1.5 percentage point or 1.15 percentage points on the S&P 500, but 1.18 percentage points on the Nasdaq, mainly due to the fact that, the annual Jackson Hole symposium saw US Fed Chair Jerome Powell speak. He basically came out and said, you know, we’re liking where inflation’s going. We’re we’re pretty convinced that we’re going to do a rate cut here in September. And how endorsed using the Fed’s policy, saying further cooling in the job market, which we’ll cover in a bit, would be unwelcome. He also expressed confidence that inflation was in breach of the U.S. central bank’s 2% target. Here’s the actual quote around the upside risk to inflation have diminishing. The downside risks to employment have increased. The time has come for policy to adjust, the direction of travel is clear, and the timing and the pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risk. That basically took a massive hit to the two and ten year yields. Two year yields down 2.2 percentage points ten year yields down 1.4 percentage points. Dollar index dropped about a full percentage point. Bitcoin but still you know basically flat up crossing over that 60,000 mark $64,062 crude oil off the back of those comments a rate cuts always good for demand up 2.5 percentage point 7483. And we look to open here very shortly and probably around that $75 mark. So as you listen to this Monday morning as things roll around, you know, I, I I’d wager to bet prices have probably jumped over $75. But we will see Brant oil. It’s only up about a quarter of a percentage point 7920. Natural gas took a nice big swing, 11.5 percentage points to the downside. Still above $2, but sitting there about $2.02. Again, you know, natural gas is much more determined on overall stock volumes, not necessarily the day to day swings of demand. And you know, it’s yeah, as things get as we get cooler and, you know, we were supposed to be really hot summer. It has been trust me I’m dying here in Texas. As the forecast revisions indicate that it might be getting a little bit cooler or it’s not going to be as hot in the next coming months. Thank goodness you’ll see a tick down in natural gas. The other thing that we did see was your xlp contract, which is kind of your aggregate of all of your US EMP companies, was up about two percentage points. So again, with all of this, you know, with with what hopefully could be a ceasefire in Gaza right now, you know, that’s going to calm markets right now. You know hopefully you know things continue to move. You know, we are seeing the oil. You know the oil market is still tight. According to a note by Morgan Stanley, this is their quote for now. The bounce in the oil market is tight, with inventories drawing approximately 1.2 million barrels per day in the last four weeks, which we expect will continue in the balance of which basically they expect that to continue according their obviously the data coming in from China. So I you know, we we’ve swung really heavily. We swung from 80 to 70. We really know that floor right now is 70. It’s going to take a massive, you know, shifting of sentiment to get it below 70 is probably going to also take a massive shift sentiment on the upside to get it above 80. And that bandwidth is a pretty comfortable 70 to $80 bandwidth. [00:17:53][193.2]

Michael Tanner: [00:17:54] We also did see breakouts come on on Friday. US rigs shed one over a one rig week over week. That’s down 47 from a year prior, which is is still pretty crazy. You know, again, I think the volatility right now you’re seeing in the oil markets in the uncertainty about where prices will go, I think are giving companies, you know, room to pause. I also would say that, you know, this declining rig count is becoming indicative of the fact that tier one assets are becoming less and less. And and companies are one either waiting for higher oil prices or attempting to optimize their programs. Hey, we’re going to just go we’re going to do a pad program. We’re not going to add rigs to kind of go dual or dual drill these wells. We’re just going to methodically go do that with the same rig we already have. So that increase you’d see of rigs is going. Obviously, I think the decline in in the availability of tier one assets is going to become a big thing. We talk a lot about that on our Deal Spotlight podcast. So I’d encourage you to go check that out here on this feed. [00:18:51][56.9]

Michael Tanner: [00:18:51] That’s really all I’ve got though guys. Kind of a crazy week. I will be out of the chair tomorrow. So Steve will be rocking a solo show and then we will be back together all with you to finish out this week. But as always, guys appreciate you checking us out here on The World’s Greatest Podcast with Stuart Turley I’m Michael Tanner. We’ll see you tomorrow folks. [00:18:51][0.0][1117.9]

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