It would be too easy to blame yesterday’s price weakness merely on the resurrection of infection rates although it certainly provided a more than acceptable excuse to flush out some weak length. The Delta variant of the virus is spreading in Europe and several Southeast Asian nations are battling with flare-ups. Sidney and Darwin in Australia have been forced to re-introduce lockdowns. Daily cases, however, at around 370,000 are well below the last peak of nearly 1 million seen in April and the number of administered inoculations is solidly rising and will soon exceed the 3 billion mark, the Covid-19 dashboard of the Johns Hopkins University shows.
Last Friday’s US Supreme Court ruling that allows waivers to be granted for smaller refineries from biofuel blending put CME crack spreads under immense and immediate pressure and still reverberated yesterday. The RBOB/ WTI spread fell from $22.50/bbl on Thursday to as low as $20/bbl yesterday and RIN prices have also been battered. The end of the first half of the year, which will have brought mouth-watering returns to investors might also provide an unmissable opportunity to realize profit, at least this what the spectacular 26 cents/bbl collapse in the August/September Brent spread suggests.
Yesterday’s retracement, if continues for a few more days, could make the OPEC+ producer group extra cautious when adjusting their output policy in Thursday’s ministerial meeting. The current consensus is that the alliance would add 500,000 mbpd-1 mbd of extra supply from August as global demand continues to recover – anything below that will likely be greeted with renewed enthusiasm. Regional surges in infection rates are not expected to derail the economic recovery and stock markets remain stable. The MSCI Global Equity Index settled at a new record high yesterday. An imminent US return to the 2015 Iranian nuclear accord is also getting further away by the day. Given the resilience of the current uptrend a pullback has always been on the menu. It came yesterday, it might follow through today and tomorrow, but the narrative of the past few months has not changed: the war against the virus is being gradually won, the global economy and oil demand are recovering, oil supply is being effectively managed therefore dips are probably viewed by ardent bulls as attractive buying opportunities.
Another way to deal with inflation
What is common in oil, metals, coal, commodity indices in general, iron ore and bitcoin? They have all come in the crosshair of Chinese regulators. Clearly, the recovery from the pandemic, rising aggregate demand, the resultant jump in commodity and within that raw material prices together with supply bottlenecks do not only worry the Federal Reserve but China, as well. Factory prices in the world’s second biggest economy were up by 9% last month versus the comparable period of 2020, according to the National Bureau of Statistics. It was the speediest year-on-year increase since 2008. Although consumer prices have failed to follow inflated producer prices unless something is done it is only a question of time that the price increase permeates to the consumer segment of the economy. Unlike the US where galloping inflation is chiefly tamed by using traditional central bank’s tools, such as tightening accommodative monetary policy and raising interest rates, China also uses its regulatory power to put a cap on price rise. Regulatory action also serves the purpose of cracking down on speculation.
As we outlined in our note on June 18 Chinese authorities are stepping up their efforts to dent oil demand from independent refiners by introducing consumption tax on imported bitumen blend and on blended heavy crudes. The use of crude oil quota and imports are also under scrutiny and there are ongoing investigations to find out whether state oil companies have resold their imported crude. Attention has, however, spun over to other commodities.
The National Development and Reform Commission (NDRC) will issue new rules, effective from August 1, that will standardise the compilation of commodity indices. Price data on soft commodities, metals and oil are sold to traders and are widely used in settling physical transactions or even derivatives. One index provider, for example, uses fuel data from 70 cities to compile its fuel index, which is then sold on to the NDRC, which uses it for price monitoring purposes. The new rules are aimed to reduce the conflict of interest whereas index providers will be independent from stakeholders who are involved in markets that particular index is meant to serve. The composition and the methodology of the indices will have to be disclosed. The proposed changes will give authorities the power to take disciplinary action in case of non-compliance.
Of course, there are other methods to cool overheated commodity markets. The National Food and Reserve Administration has pledged to release metal stocks, including zinc, aluminium, and copper in several batches to processors to ascertain adequate supply and rein in higher prices. Beijing has allegedly also instructed state-owned companies to reduce their involvement in foreign commodity markets. Additionally, it promised to come down hard on “malicious speculation” on commodities, such as iron ore, steel, copper, and other nonferrous metals and coal. It pledged to track prices, increase supervision, and promised “zero tolerance” on hoarding, price manipulation and spreading false information.
Although a different kind of beast, bitcoin miners and traders are also feeling the full force of regulatory power. After authorities in the Sichuan province shut down cryptocurrency mining projects, the People’s Bank of China urged the country’s banks and payment firms, including Alipay to suspend their services in account opening, clearing and settlement in cryptocurrency activities. The move has sent shivers down on crypto-investors’ spines and the best-known crypto currency, Bitcoin, broke below $30,000 for the first time in five months last week (although it recovered to $34,000 yesterday) whilst the whole industry has lost $400 billion of its value by last Tuesday. In the light of the latest attempts from Chinese regulators one can only wonder whether the authorities’ intention to crack down on speculation and moderate commodity price rise will have a meaningful impact on international prices.