Oil prices dropped early on Wednesday after China said it was considering an intervention on the domestic coal market to reduce the record prices down to a “reasonable range.”
As of 7:56 a.m. EDT on Wednesday, before the weekly EIA inventory report, WTI Crude prices were down 1.11% at $82.04, and Brent Crude was trading down by 0.96% to $84.26.
Oil prices continued to fall from the multi-year highs reached early this past Monday, when WTI Crude hit the highest level since October 2014 at $83.73, and the international benchmark briefly jumped above $86 per barrel at $86.04, which was the highest price since October 2018.
The key trigger of the price retreat early on Wednesday came from China, where the National Development and Reform Commission (NDRC) said that the government was considering an intervention to reduce the price of coal whose recent “increase has completely deviated from the fundamentals of supply and demand.”
“The heating season is approaching and the price is still showing a further irrational upward trend,” Reuters quoted the commission as saying.
The possible Chinese intervention sent the key Chinese coal futures plunging early on Wednesday.
On Tuesday, the most actively traded coal futures in China had hit a fresh record-high after the energy crisis worsened because of colder weather in recent days.
A Chinese intervention to bring coal prices down could “reverse the fuel switch to oil,” analysts at Commerzbank told Reuters.
Oil prices were also weighed down by profit-taking and a fourth straight week of U.S. crude oil inventory builds as estimated on Tuesday by the American Petroleum Institute (API).
The build last week was estimated at 3.294 million barrels, above analyst expectations of a 2.233-million-barrel build. Still, the API report was not entirely bearish for market sentiment because gasoline and distillate inventories, as well as crude stocks at the Cushing hub, were estimated to have dropped last week.
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By Tsvetana Paraskova for Oilprice.com
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Such interventions aren’t dissimilar to Central banks’ interventions to support a falling currency. They end up losing a big chunk of their reserve currencies with hardly any effect on the falling currency.
Therefore, any intervention by China to force the coal price down will fail and with it the current switch from natural gas to oil. The only course of action is either to let prices take their course or to raise production.
Today’s decline in Brent crude oil price is temporary and mostly prompted by profit-taking. Soon oil prices will resume their surge underpinned by robust demand and ongoing gas-to-oil switch.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London