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 [12]:
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 [13], 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 [14]:
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.
