Crude Down on Weak China Data, Optimism For Healthy 2020 Replaced by Doubt

CMC Markets believes crude's upside will be limited this year: File Image/PixaBay

Lacklustre crude trading on Friday based on reports of tepid China economic growth caused another round of weekly losses for two key benchmarks - and the optimism earlier this week of a healthy market in 2020 is suddenly shifting to the negative within analytical circles.

Government data on Friday showed that China's economy grew by 6.1 percent in 2019, its slowest expansion in 29 years; this inspired Margaret Yang, market analyst at CMC Markets, to state that "Mounting downward economic pressure will perhaps limit oil's upside in the mid- to long-term."

But that is a questionable notion at best: government data also revealed that Chinese refineries in 2019 processed 651.98 million tonnes of crude oil, equal to a record high 13.04 million barrels per day (bpd) and up 7.6 percent from 2018; a monthly throughout record was also set for December.

In the previous session, many analysts believed demand would grow as a result of the new U.S./China trade deal, in which the latter committed to an additional $54 billion in energy purchases from the former; but on Friday that optimism was replaced by comments such as those from Jim Ritterbusch, president of Ritterbusch and Associates, who said, "China has agreed to purchase a massive amount of U.S. oil that may prove difficult to digest."

As a result, Brent on Friday rose 23 cents to settle at $64.85 per barrel and West Texas Intermediate  rose 2 cents to settle at $58.54 per barrel - not enough to prevent the benchmarks from falling for the week by 0.2 and 0.8 percent respectively.

Meanwhile, keeping in the spirit of a gloomy Friday, John Kemp, commodities analysts for Reuters, added to the recurring notion that the U.S. shale boom is over by reporting that low prices "have brought the drilling and production boom of 2017/18 to a halt" - and the slowdown will intensify this year.

Kemp stated that while U.S. crude oil output was up almost 9 percent in the three months between August and October compared with the same period in 2018, the annual growth rate had already slowed from a peak of more than 21 percent in August-October 2018 compared with the same period in 2017.

Kemp added that Energy Information Administration figures forecast growth will slow further to just 4.5 percent year-on-year in the final three months of 2020, dropping to 4.1 percent in the final three months of 2021.

Still, Kemp wasn't entirely pessimistic: he mentioned insider talk about the shale industry entering a new era of "capital discipline" that will curb output growth and focus on improving returns to shareholders by limiting drilling activity.

He concluded, "The implication is that drilling rates will remain low when prices start to rise, delivering a sustainable rebound in both revenues and profitability."