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By Barani Krishnan — China has kicked off the year by buying large quantities of oil despite its worrying COVID situation. But before bulls in the market get excited again at the prospect of $100 a barrel, the Chinese actions seemed geared more towards storing crude than buying it for immediate use. In the energy universe, storage is a dirty word that tends to depress, rather than lift, prices.
China has also increased export quotas for refined oil products in the first batch for 2023, signaling expectations of poor domestic demand. Its focus is on the international market as independent refiners in the country see higher profits from processing Russian oil, made cheaper by the day by Western sanctions on Moscow that give the Chinese leverage to negotiate for steeper discounts.
In a parallel world, Saudi Arabia’s Aramco (TADAWUL:) oil company this week slashed the selling price of its benchmark Arab Light crude to lows not seen since November 2021. It was a calculated move to keep Saudi barrels attractive amid persistent discounting on Russian oil after the G7 price cap of $60 per barrel on seaborne Russian crude.
Already the world’s largest oil importer, China was reported on Friday to have bought five million barrels of mostly-Kazakh crude for collection from a port in the Black Sea next month, according to traders cited by Bloomberg. In daily flow terms, it’s the largest Kazakh crude purchase since at least the start of 2021.
The purchase matters because Kazakh oil has been the preserve of European refiners, especially since the middle of last year when companies in the European Union cut purchases from Russia following the Ukraine invasion.
The Chinese purchase seems politically motivated as well, as Kazakhstan pivots from Moscow towards Beijing, after the Ukraine invasion raised concerns about which territories in the region might be on Russia’s hit list next.
Physical traders report that Europe’s own demand for Kazakh oil, along with Chinese buying, has raised prices for the commodity. The so-called CPC Blend crude from Kazakhstan has rallied to a discount of $3 a barrel versus Dated Brent, an international marker for physical oil transactions. As recently as a month ago, the CPC Blend was at $8 below Dated Brent. 
China International United Petroleum & Chemicals Co, or Unipec, has also bought at least 2 million barrels of crude from Norway’s Johan Sverdrup oil field for January loading. Johan Sverdrup oil is now fetching $3 to $4 a barrel below Dated Brent, having been at a discount of more than $6 in early December. 
But the bump-up in pricing for Kazakh CPC and Johan Sverdrup crude do not go anywhere near to mitigating the discount on Russian barrels. Before we explore  Russian oil pricing in greater detail, let’s take a look at China’s demand for oil, which is a preeminent factor in valuing crude.
Demand for oil in China typically rises each year after the Lunar New Year, which, this year, is due at the end of January. With Beijing going from a zero-COVID to a que-sera-sera COVID policy, there’s no telling now how its oil demand will fare. Data for the just-ended week showed Chinese manufacturing activity shrank for a fifth straight month in December, as the country grappled with an unprecedented spike in coronavirus cases. 
Still, some oil bulls are banking on a near-term springback in Chinese demand to lead to three-digit pricing.
“Despite all of this talk of slowing demand, which is happening due to higher [U.S. interest] rates and warm weather, the reality is if you look at the big picture, supplies are still way too tight,” said Phil Flynn, an analyst at Chicago’s Price Futures Group and one of the most vocal on the long side of the trade. “The [supplies] will get even tighter if normal weather returns and will spike as China revs up from COVID lockdowns.”
Some reject that notion.
“To me, the market is oversupplied by at least 1 million barrels a day,” said Gary Ross, a veteran oil consultant-turned-hedge-fund-manager at Black Gold Investors. “We are going to have large stock builds. In a couple of weeks, you’re going to be building 10 million barrels a week; how is the market going to handle that?” 
If China’s economy performs slower than expected, then the large quantities of oil it is buying now will likely end up in storage. Such an expansion in storage could widen the contango in oil. Both U.S. crude and Brent are now in contango, a market dynamic where longer-dated oil is priced higher than nearby contracts, making it unprofitable for those trying to hold a futures position by rolling out of the expiring front-month into the next closest contract. 
At Friday’s close, the contango between the February and March contracts in U.S. crude was at 27 cents a barrel. The difference between March and April Brent was 18 cents. By historical standards, the price gaps are small. But they could grow if the storage situation expands.
To make up for its tepid oil demand at home, China is ramping up output of refined oil products for export. The result would be more competition to other international suppliers of refined products, including the United States, and more pricing pressure on this front. 
In past years, the Chinese were major suppliers of refined products to the Pacific markets. But they slashed their refined production abruptly last year as domestic demand for oil fell — a decision that the powers-that-be in Beijing are presumably lamenting.
“The Chinese totally missed out on last year’s huge crack spreads for refined products by limiting the capacity of their independent refiners,” said John Kilduff, partner at New York energy hedge fund Again Capital. “The Chinese thought they were protecting their internal oil market with the curtailment in production, without realizing the damage they were causing to their export market for refined products. They have also woken up to that now.”
On the other end, “the Saudis have woken up to the fact that the Russians are eating their lunch”, notes Kilduff.
Russian Urals crude is going to Chinese and Indian buyers at around $58-$59 a barrel now versus Brent’s close on Friday at under $79. China is, meanwhile, buying so-called ESPO crude from Siberia at above the G7’s $60 price cap because independent refiners, mainly located in the eastern province of Shandong, are attracted to the oil’s short shipping distance and low-sulfur quality, traders said.
ESPO crude – shipped on the 4,188km-long Eastern Siberia Pacific Ocean pipeline – is oil from fields at Tomsk Oblast and the Khanty-Mansi Autonomous Okrug in Western Siberia.
Spot discounts for ESPO crude have widened with at least one January-arrival ESPO cargo sold to an independent refiner last week at a discount of around $6.50 per barrel against the March ICE Brent price on a delivery-ex-ship (DES) basis, Reuters reported, citing two traders with knowledge of the deal. 
Other cargoes for the same delivery month had traded at around a discount of about $5 a barrel, widening from a discount of $4 in the prior week, the traders said.
As most Chinese refiners will soon wrap up purchases of crude to be delivered ahead of the Lunar New Year on Jan. 20, ESPO sellers are also keen to clear cargoes on hand even at slightly lower prices, according to a Shandong-based oil trading source.
“Chinese buyers are bidding at lower prices as they now have bigger leverage on price negotiation,” the person said.
The price war deepened in recent days after the Saudis dropped the Official Selling Price on their Arab Light crude, said Kilduff of Again Capital.
“The Saudis anticipate that by dropping their price, those who want oil, even on a deferred basis, will lock in now,” said Kilduff. “But if demand for spot crude is weak, it could lead to builds in oil storage – exactly what will encourage the contango to grow.” 
Kilduff also observed that Russia’s gamble on Ukraine hasn’t gone as Vladimir Putin had expected. “The Ukraine premium in oil now is just about $10 a barrel. A year ago, it was around $30, along with another $30 to $40 in pandemic-related supply chain disruptions. That’s what pushed crude to 14-year highs of between $130 and $140 in early March. Now, we’re trading closer to realistic value.”
Oil: Market Settlements and Activity 
New York-traded crude registered a final trade of $73.73 per barrel, after officially ending Friday’s session at $73.77, up just 10 cents, or 0.1%. 
For the week, WTI, as the U.S. crude benchmark is known, was down 8.3%, posting its largest weekly drop since the week ended Dec. 2. The dismal weekly showing came after WTI’s drop of 10% between Tuesday and Wednesday – the worst for any first two days of a trading year in oil since 1991. 
London-traded crude registered a final trade of $78.60 per barrel, after officially ending Friday’s session at $78.57, down 12 cents, or 0.2%. The global crude benchmark reached as high as $80.56 earlier on Friday. For the week, Brent was down 8.5%.
The crude price collapse in the first two days of 2023 came on the back of fresh warnings about a global recession and on fears of China falling into a coronavirus crisis similar to the one it experienced three years ago.
Friday’s initial advance in oil, which followed Thursday’s rebound, came as moderating U.S. jobs growth signaled more slowing ofby the Federal Reserve.
Oil: Price Outlook
Sunil Kumar Dixit, chief technical strategist at, noted that WTI finished the week under extreme bearish pressure as prices faced rejection from the $81.50 key resistance zone built around the 50-Day Exponential Moving Average.
“Going further, a sustained break below $72 will prompt a quick drop to the horizontal support of $70.”  
“If this $70 level creates demand, WTI can resume its advance towards the broken-support-turned-resistance zone of the 5-week EMA $77, followed by the 50-Day EMA of 79.50 and extend its rebound toward the 100-week Simple Moving Average of $82.90.”
Dixit, however, cautions that if bulls fail to defend the $72 & $70 support, “the next bearish wave will lead WTI to reach the 200 week SMA of $65.50.”
Natural Gas: Market Settlements and Activity 
On the natural gas front, prices have tumbled for a third week in a row, forcing America’s premier heating fuel down 17% on the week and more than 50% lower over a three-week period.
Gas futures’ benchmark contact on the New York Mercantile Exchange’s Henry Hub did a final trade of $3.761 per million British thermal units after officially settling Friday’s session at $3.71 per mmBtu. February gas was down 10 cents, or 2.6% on the day. For the week, it was off 76.50 cents, or 17.1%.
The tumble came as market participants looked beyond the weekly draw in U.S. gas inventories reported by the Energy Information Administration, or EIA, to focus on more unseasonable warmth expected for this winter.
Natural Gas: Price Outlook
Dixit says natural gas could return to above $4, although the chance for a sustained push higher appeared small for now.
“As long as prices keep above $3.60, some upward move towards $3.88 followed by a gap area of $4.2 is likely,” he said.
“Yet, sustainability below $3.60 may extend the drop to $3.03.”
Gold: Market Settlements and Activity 
Gold futures’ benchmark contract on New York’s Comex did a final trade of $1,870.50 per ounce after officially ending Friday’s session at $1,869.70. For the day, February gold was up $29.10, or 1.6%.
For the week, it rose around 2.4%, rising for a sixth time in seven weeks. Friday’s session peak of $1,870.15 was just shy of Wednesday’s high of $1,871.30 — which was the loftiest level for Comex gold since June 17.
The , which is more closely followed than futures by some traders, settled at $1,865.97., up $32.92, or 1.8%, on the day. For the week, it rose 2.1%. Spot gold’s intraday peak for Friday was $1,869.88 – also the highest since June 17.
Gold: Price Outlook 
Gold bulls will need to defend the $1,850-$1,830 support areas in order to keep alive the momentum in the yellow metal and test the next level of $1,896. 
“Spot gold is known to spend a couple of weeks into momentum distribution and accumulation which is mostly perceived as indecision. This often happens before the next leg up begins.”
“Substantial buying above the $1,900 line will bring the much-needed $1,940-$1,970 bull targets in closer proximity.”
The uptrend will be invalidated by any breakthrough below $1,825, Dixit warns.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.

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