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Mysterious Buying And Selling By China Distorts Mid-East Oil Price, Baffles Traders
Well, leave it to China - whose economic deceleration is in many ways behind the worldwide demand dearth and attendant global deflationary supply glut - to turn the existing supply/demand imbalance for the world’s most important (and financialized) commodity on its head leading to mass confusion among market participants.
Apparently, two state-owned Chinese oil trading companies (Chinaoil, which is the trading arm of state-run China National Petroleum Corp. and Unipec, which is owned by Sinopec) have been busy monopolizing the Dubai spot market, as a bout of suspicious trading activity between the two has served to distort prices and confuse other traders.
Chinaoil bought a record 72 out of the 78 cargoes traded in the Dubai cash market last month, "most of which", Bloomberg says, were purchased from Unipec. Here’s more:
The record buying in Singapore was part of the market-on-close price assessment process run by Platts, a unit of McGraw Hill Financial Inc., where bids, offers and deals are reported by traders through e-mails, instant messages and phone conversations in a fixed period each day. These are used to create end-of-day price assessments for various commodities and form benchmarks for transactions globally.
“Chinaoil and Unipec each have their own trading book and strategy,” Ehsan Ul-Haq, a senior market consultant at KBC Advanced Technologies, said by phone from London. “The Chinese government will not hinder free trading.”
Amusingly, Chinaoil’s buying looks to have sent the market into backwardation in stark contrast to Brent and WTI:
The Dubai market is now in strong backwardation—a market structure in which current prices are higher than future prices—due to Chinaoil’s large purchases. Global benchmarks like Brent and West Texas Intermediate are in a sharp contango—where the front month contract price is sharply lower than future prices.
As WSJ notes, the trading between the two SOEs would seem to indicate that "one [is trying to] push prices higher and the other attempting to keep prices down", but as Victor Shum, vice president at industry consultant IHS Inc told Bloomberg by phone, that’s "unsettling [and] confusing and defies market logic."
"It’s very odd that these two companies are up against each other," he added. The effect on pricing also throws Platts model into question given that it's clearly possible for one market participant to effectively dictate prices, a situation that would seem, at first glance anyway, to be dangerous given that, as WSJ reminds us, "Dubai crude...has been the main Asian oil benchmark since the mid-1980s."
As for what’s going on here, no one really seems to know. Some suggest it's "opportunistic stockpiling" or that Chinaoil is executing some manner of arbitrage in the futures market. WSJ also seems to suggest (although they're polite about it) that Chinaoil could be looking to gouge domestic refiners who it sells to by driving up the Dubai reference price.
In the end, this is effectively two Chinese SOEs setting the benchmark and the effect is to make Middle Eastern crude less competitive due to the relatively high price and that, in turn, is causing North Sea producers to scramble to secure supertankers to transport crude to Asia where the Dubai price is the benchmark. Here's a bit more on this dynamic from Reuters:
The strong Dubai trade has forced Middle East producers to raise official selling prices (OSPs), driving Asian buyers to seek cheaper oil elsewhere or cut refinery runs due to low margins.
Chinaoil and Unipec, trading units of PetroChina and Sinopec, respectively, traded record volumes of crude in early August on pricing agency Platts' market assessment process. This pushed up prompt physical Dubai prices against future months, creating a backwardated market structure usually associated with supply shortages.
In contrast, a global oil glut has kept Brent and West Texas Intermediate (WTI) crude futures in contango this year, and most analysts see the surplus lasting well into next year.
"Platts should be seriously concerned as I am sure they want a fair market price, and the Dubai market now seems to become dysfunctional," said Oystein Berentsen, managing director of crude oil at Singapore-based Strong Petrochemical.
"If the large positions taken by Chinese state companies are occasionally distorting the market, Middle East producers may have difficulties pricing their crudes competitively," energy consultancy FGE said in a note.
Needless to say, there's likely far more to the story here than meets the eye, especially considering the fact that this is two Chinese SOEs buying and selling to each other. One can't help but wonder if there's an ulterior motive here.
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wow, it's almost like they're pigeons knocking over pieces on the chessboard instead of enlightened and savvy Go players... gee, who could have guessed...
Andy Hall just doesn't know when to fold em, does he?!
this is all so confusing...let me see if I got this right.
The Western Insider Manipulators, are being deceived by the Eastern Insider Manipulators.
Since...only Western Insider Manipulators are blessed by God...we can expect to see formal complaints now made to some Insider Bureaucracy who is paid to rule in favor of the Westerners.
What? Are you crazy? Why do you keep throwing "manipulation" into this conversation? When two actors who both trace back to the same small group of people trade in such a way that they dictate the price that everyone else within that market pays, that is called "free trade". The US government is working on a treaty called TPP to ensure the sanctity of this concept in more markets. Please make sure your dictionary is up to date. Manipulation, pshaw!
The Chinese have learned that they can also play the manipulation game. Once the other players realize that foreign entities with enormous pockets and hidden, hostile agendas are trowing wrenches in their carefully crafted trading structures, HFT algo's and old-boy clubs, then the game might be finally up. We live in interesting times...
The treaty is like the petrodollar, gld stock, toilet paper, and the Munich Declaration. Peace in our time.
What a mess.
My hypothesis for some time now has been that the Chinese have developed a well thought out plan to bring down the West's financial system. That system has based it's strength in the predictable nature of the 'markets'. Massive derivative exposure is no problem if nothing ever disturbs the apple cart those positions are based on. Every dip is a buying opportunity. Their stock market ramp and now its demise have been driven by official decisions at each step. The Yuan is now being jacked up and then dropped down in fluctuating, unpredictable events. They know that they will rise from chaos faster than the West so they are willing to bring it on. Expect it to continue.
On the other hand they may just be inept bunglers and I'm being fooled by randomness.
I want to know what currencies they are buying and selling the oil.
Remember if you are a worker in China..you have to look like you are doing something....so these guys selling to each other..moves the paper on the desk to make it look like you are doing something.....Government at work...so to speak
China knows that conflict with America is coming. And so is locking in oil at current bargain prices.
Bullish for fracking.
How about driving up oil prices for end of month financials? 25% increase in value of underlying assets better for financials. 50>>40 when oil is securing loans, no? Just a guess here.
Backwardation is a sure sign of Talibanic influence in oil markets; like Bacha bazi.
Doing bacha bazi to oil is considered the greatest sin in the world of Saud.
"I would not do that to my goat let alone to my barrel of black gold."
These chinks are teaching a camel driver how to spend midnight on a lonely night without the moon in full bloom.
Intizar! Imagine the state of the barrel when the sun rises! Full of bullet holes of the ISIS !
You can kill a barrel of oil by smoking it but you can't shave its black beard nor cut off its fountain head! Ayn Rand could have told you that!
Try dancing a good tango with it; and I'll contango you!
confusing traders, skewing market fundamentals, and expectations, what the ppt is going on here?
They are buying "Physical"--maybe a way to get rig of Treasuries..they bought 72 of the 76 freighters last month. That would be a way to dump dollars without having to turn them in to the FED..Then,they sell the oil to other Asian countries and possible demand Yuan---kind of making their own "PetroDollar" QE
Comments like this: why I keep returning to this site.
What ulterior motive are you thinking of?
Note that this is happening at the same time that multiple explosions are happening in the Chinese chemical space. This is the most bizarre war the world has yet seen, as it is completely unacknowledged by either side, but make no mistake, there are hostile acts being taken by both. The question is who are the real combatants? It's certainly not any "people" against any other "people". The elite groups in each country are directly attacking each other's interests. Sadly, however, I'm guessing that won't last long.
You do yourself no service talking absurd rot. The Chinese have an extensive history of large explosions and fires due to unsafe storage and handling. The difference is you just found out, and are unable to stop fantasizing for long enough to do some reality-checking.
Maybe. I certainly agree that the Chinese are not paragons of safe-handling of just about anything, up to and including milk for babies.
The logical follow-up to your line of thinking, then, would be why are these explosions now getting the publicity they have not gotten before? Who wants us to know about this and why?
Ah, now you're getting somewhere. We know from a many sources China has been dying on the vine economically (relatively speaking), for at least 2 years. Less demand means more inventory and lower sales, so less profit. Thus incompetent managers without understanding the dangers realize they need to cut costs, so some expensive salaried workers a laid off in favor of the cheaper and less skilled. But the people laid off also happen to be the people who actually know their chemistry and what this crap is, and how to handle and store it.
But due to storage costs the management then decides to move to new storage, in places like ports, as the excess-capacity of low demand means there's a lot of cheap rental warehouse space available. So they move it in, on the quiet, and their bottom-line is still looking OK. Win-Win!
This is just a potential explanation, speculation, but testable, and something to work with. If approximately correct and a widespread response to unregulated economic decline of conditions, there will be more detonations to come.
And thank you for not taking my comment too badly.
You and I had our run-in in the past, and I apologize for my lack of respect at the time. I thought you were someone you are not, with hindsight.
As to your explanation, it's plausible. I have been expecting China to implode since 2005, and maybe this is simply the most visible sign of the implosion finally coming to pass.
There are an awful lot of these explosions happening in a very short timeframe, however, including one in Japan on a US base, which would not be related to the theory you put forth. Suspicious at the very least.
I haven't been expecting them to go belly up until around now, simply as a result of debt load and diminishing return on (and higher corruption) each successive wave of stimulus. I've Watched china from a commodities viewpoint and they were always going to hit a debt wall. Japan did the exact same thing for a decade in the 1980's. Ten years of slow down an cheap prices now in commodities, where the big players dominate, then India will boom next with easy credit until it also is a harnessed debt-donkey.
I was close to and explosion that destroyed a train and part of a brewery, large wagons being thrown ~150 meters in the air landing all around. It happens. I don't find it that unusual in a country of 1.3 billion to get regular explosions. It's the scale of blasts that distinguishes the more recent ones. Suggests inventory storage conditions degraded and volumes increased.
China has tried to buy everything with loans they won't repay. Being communists, private property is optional, not a right to possession. So hard assets will be nationalized and used as collateral on new loans. I feel sorry for some of the better western manufacturers who set up big new plants there, as they can lose the entire hard asset base by decree, and it's just dawning on them that the communists can arbitrarily change contract arrangements and policies overnight. Early adopters take that risk though. I know some companies I really like exposed to this, so not a good feeling for me about where this is going.
IF one is planning on going to WAR or embarking upon an imperialist/annexation campaign it is best to secure the petroleum required to both project military strength and to sustain domestic industries employed in support of the effort(s)...
China has oil storage capacity, so buy low and sell high.
Inscrutable.
Is a barrel in the hand worth more than a petrodollar in the bush?
Hmmmm.