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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Prices Edge Lower As Output Freeze Hopes Fizzle Again

OPEC oil

After yesterday's accord between Saudi Arabia and Russia ignited an effervescent oil rally, we have now seen these hopes fizzle out once more. As the 'task force' agreement references no crimping of production levels, prices are now heading lower from Friday's close. Hark, here are five things to consider in energy markets today:

1) While we are seemingly on a perpetual treadmill of production freeze talk, it is refreshing to hear that new OPEC member Indonesia is comfortable with crude prices between $40 - $50. Its economy remains in fairly rude health, with the IMF projecting its economy will grow at just shy of 5 percent this year, and just above that next year.

It is the only cartel member in Asia-Pacific, exporting $6.4 billion of petroleum last year, and is the largest economy in South East Asia. The leading recipients of its oil this year are China, Japan, U.S., Australia and Thailand:

(Click to enlarge)

2) Last week we discussed how oil imports into northern China have been slowing due to lesser demand from China's independent refiners, or 'teapots'. The chart below helps to illustrate this point: the run rates for these teapots have been dropping in recent months, and are now running at their slowest pace in more than seven months.

While part of this slowing is due to congestion and a lack of storage capacity, lower profits and higher fuel-quality standards may also crimp activity going forward. An immediate threat comes in the form of a tax crackdown, as authorities look to crack down on teapot refiners evading taxes or falsifying documents. As regulations are set to increase, processing is expected to slow further.

(Click to enlarge)

3) The oil market is perpetually fascinating, given there are so many different ways it can be interpreted. This is illustrated brilliantly today through these two contrasting headlines: 'no sign oil market is rebalancing' and 'oil market is already rebalanced'. We believe it is neither...it is somewhere in between.

4) Coal is seeing both a resurgence in trading volume and price across the globe, giving us tentative signs of rising commodity demand going forward. While trading volumes have surged in Europe, up nearly 50 percent in the first half of the year to 3.5 billion tonnes, the price of Australia's coking coal has rallied more than 45 percent in the last three weeks, boosted by rising Chinese demand.

A drop in domestic Chinese coal production has also ignited the recent rally; a limit on the number of days that miners can work, in combination with heavy rains and flooding, has helped crimp output. According to customs data, Chinese coal imports are up 12 percent through the first seven months of the year. As the chart below illustrates, Chinese crude-steel output has consistently been above year-ago levels in 2016. It is estimated that 770 kilograms of coal is needed to producer one ton of steel.

(Click to enlarge)

5) Finally, I made a last-minute Labor Day appearance on CNBC Asia yesterday evening to react to the latest developments betwixt Saudi and Russia. You can catch a snippet of part of the interview here.

By Matt Smith

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