It couldn’t have come at a worse time for OPEC and the oil bulls who rely on the cartel, but China has begun to slow its crude purchases—much like it has delayed its copper imports. So far, the reduction has been minimal, with a year-on-year decrease of only 3% from January to June.
OPEC+ brings together the 13 original members of Saudi-led OPEC or the Organization of the Petroleum Exporting Countries and ten other oil producers led by Russia. Since the beginning of July, the 23-nation alliance has been in disarray as OPEC’s top members. Saudi Arabia and the United Arab Emirates have been unable to reach an agreement on August production levels.
OPEC+ was supposed to have agreed on a 400,000-barrel-per-day increase in August.
Until the Saudi-UAE spat, oil had a near-perfect rally, with US crude up 57 percent on the year and U.K. Brent up nearly 50 percent on OPEC’s model of production unity. The producer alliance began by withholding 10 million barrels per day from the market to restore prices that the coronavirus pandemic had virtually destroyed.
OPEC+ had only recently begun to increase production marginally. Until now, it has withheld nearly 6.0 million barrels of daily capacity from buyers in a market that may be short of supply as peak summer energy demand kicks in.
That is what drove oil’s fairytale-like rally from minus $40 per barrel of US crude height of the COVID pandemic to around $75 now. While the market remains upbeat, it has become much more volatile since OPEC’s blunder with August production. However, OPEC is not the only source of oil’s problems.
With China emerging as the third opposing force in the oil market, the demand outlook becomes shakier. The country isn’t just a fan of commodity supercycles; it can also be a silent bear when prices don’t go their way or harm the economy.
On May 10, when the world’s most in-demand base metal reached record highs of $10,746 per tonne on the London Metal Exchange, its largest buyer decided enough was enough. China brought the copper rally to a halt in May by reducing copper imports systemically in the weeks that followed—the cutback began in April and accelerated after that.
Before China’s squeeze, LME Copper experienced a nearly uninterrupted rally between April 2020 and May of this year. And China was buying to the finish line. The difference was the price of copper, which was less than $5,200 per tonne in the spring of last year. It had more than doubled by this spring.
The record high price reached in May got strong opposition in China. Physical buyers sat on the sidelines and manufacturers reduced their operations. The growing disparity between the Chinese Producer Price Index and the Consumer Price Index demonstrated that the burden on manufacturers was increasing. China’s cooling of the copper market has knocked 12% off the metal’s May record high of $10,746. Meantime, LME’s three-month futures traded at around $9,400 on Tuesday.
The State Department added 14 Chinese companies and other entities to an economic denylist this week in response to alleged human rights violations.