Russian Crude Prices Recover on Strong India, China Demand

Summary:

Spot prices for Russia's key export crude grade ESPO Blend to Asia have rebounded from all-time lows amid strong demand.

Spot prices for Russia's key export crude grade ESPO Blend to Asia have rebounded from all-time lows amid strong demand from top buyers India and China and easing concerns about possible sanctions, several traders said.

The crude exported from the Pacific port of Kozmino saw its spot differentials dive from premiums to a record discount of more than $20 a barrel in March as western sanctions were slapped on Russian financial and energy companies following the country's invasion to Ukraine.

However, the European Union tweaked sanctions on Russia that came into force last month, easing payment restrictions for oil shipments from state-owned firms Rosneft and Gazpromneft - major suppliers of ESPO crude.

Prices have rebounded with at least two cargoes loading between end-September and early October sold at parity against Middle East benchmark Dubai, the sources said. Indian and Chinese independent refiners find the cargoes far more cheaply priced than Middle East oil of similar quality, they said.

In contrast, Abu Dhabi's Murban crude for September loading sold at premiums of $12-$13 a barrel.

"Russian oil is very popular among Asian refiners and at these prices it's a great value," one of the sources told Reuters. The sources spoke on condition of anonymity due to sensitivity to the matter.

Though prices have recovered, the cheaper supplies have helped to boost Asian refinery margins and price pressures could persist ahead of Europe's oil embargo later this year and possibly more sanctions on Russia.

Similarly, spot prices for Russian Urals crude typically exported to Europe are gradually recovering.

India overtook China to become the biggest buyer of Russian oil in July based on seaborne volumes. The world's No. 3 crude importer lifted a record 29.5 million barrels, Refinitiv Eikon data showed. This included 3.4 million barrels of ESPO crude.

India will continue to buy ESPO Blend oil in October, according to two of the sources.

The world's top crude importer China loaded 18.1 million barrels of seaborne ESPO crude in July, 27 per cent down from an all-time high in June, as major buyer Sinopec Corp cut purchases. Oil supplies loaded from the Russian ports dropped to 21.3 million barrels in July, the lowest since February.

India, China Prices

The ESPO crude benchmark has traditionally been priced on FOB Kozmino basis. More trades, however, are now conducted via middlemen who resell the cargoes on delivered ex-ship (DES) basis that include other costs such as shipping, insurance and financing to end users in China and India.

For example, the price of a cargo that arrived in India last month included $2 million in freight costs even though it was already priced at a wide discount of more than $7 a barrel to Dubai quotes, another source said.

Prices of ESPO crude delivered to China have also improved, traders said. Last week, cargoes for September delivery were sold at parity to ICE Brent DES basis, rebounding from a discount of $5 a barrel in March.

The European Union sanctions banning seaborne imports of Russian crude and oil products will take effect on Dec. 5.

"Given European concerns about surging energy prices, we think there could be some reticence to go all in on these punitive measures that could potentially take several million Russian barrels off the market," RBC Capital's Helima Croft said in a note.

Source: Reuters

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Comments

Add to Favorites

Olatunji Tolu

Traders' Opinions

The fiber has been stuck in a range since the 18th of July and apart from the war in Ukraine, Inflation & the likes, this could also be easily attributed to the summer effect. As during summer period, liquidity tends to thin out a bit and we see bulls & bears cancelling themselves out.

This is occurring after price broke out of the monthly Support level and reached parity. 1.0430 area should now act as Resistance and dropping to a lower timeframe for discounted entry would be the way to go.

Weekly timeframe shows 1.0350 untested Resistance is yet to be hit as the recent W1 candles suggest indecision. Will it retrace to the Resistance or drop back to the lows of the year? Only time will tell but the fiber is definitely bearish biased.

What are the implications of price almost getting to a level then stalling for a while? This might be a buildup of bulls in this case from the daily perspective. 1.0120 is the new line of defense for the bulls and if it holds, it can easily blow past the 1.0350 untested Resistance to higher Resistance areas.

As of now, price is in between the 2 key areas of interest i.e. 1.0120 Support & 1.0350 Resistance from the h4 perspective. You can also see how the range/consolidation stretches for a few weeks now. It looks worse on the h1 timeframe and best to wait for more clarity before jumping in.

Today is Non-Farm Payroll (NFP) scheduled by 1:30pm UK time and high volatility is expected, best to be on the sidelines if no clear signs of entry.

Trade Safely

Risk Warnings and Disclaimers

Comments

Add to Favorites

Owen Li

The country is the world's largest and fastest-growing producer of nickel, used in both stainless steel and electric vehicle (EV) batteries.

It banned the export of nickel ore in 2020, forcing its mining sector to build out processing capacity. The huge flows of ore to China's stainless steel mills have been replaced by shipments of nickel pig iron (NPI) and ferronickel.

The Indonesian government is now planning to tax exports of both products to stimulate more investment in domestic stainless steel capacity.

However, as stainless and battery nickel processing streams start to converge, it is equally likely the tax will tilt the Indonesian product mix further towards nickel as a battery input. Indonesian Tax Will Shake up the Nickel Export Mix Again_1

Indonesian Tax Will Shake up the Nickel Export Mix Again_1

Exports Change After Ore Ban

Indonesia's nickel boom was initially defined by China's hunger for ore to process into NPI as a stainless steel input.

China imported 161,000 tonnes of Indonesian ore in 2006. By 2013 imports had mushroomed to 41 million tonnes.

The following year Indonesia banned ore exports. It partly reversed the ban in 2017, then decided to ban exports again in 2020, this time for good. The policy flip-flop was a source of repeated turmoil in the nickel market at the time.

The export ban has been challenged by the European Union at the World Trade Organization but has achieved its aim of driving a fast expansion of first-stage nickel processing capacity.

China's ore imports from Indonesia fell to just 856,000 tonnes last year, a figure that may include some misclassified high-nickel-content iron ore.

Imports of Indonesian NPI, by contrast, have surged. In 2014, the year of the original ore ban, China imported 7,000 tonnes of Indonesian NPI and ferronickel, which are covered by the same customs code.

The figure last year was 3.14 million tonnes. The flow accelerated by another 45% to 2.28 million over the first six months of this year.

Although one Chinese operator, Tsingshan Group, has built stainless steel capacity in Indonesia, it's clear that a lot of Indonesian nickel is still leaving for Chinese mills, albeit in upgraded form.

Shifting The Mix Again

Those accelerating export flows have evidently caught the Indonesian government's attention.

A tax, possibly linked to the nickel price, could come as early as the current quarter, according to Septian Hario Seto, a deputy coordinating minister for maritime and investment affairs.

There is also an ongoing parliamentary review into capping the number of NPI and ferronickel plants operating in the country. There are currently 16 but that number is forecast to rise to 29 in five years, according to mining ministry data.

The government is concerned that too many smelters will use up the country's nickel reserves too quickly to export what is still a relatively low-value product.

An export tax would be a faster way of stemming the flow of NPI and ferronickel to China, altering again the nickel trade picture between the two countries.

Converging Process Paths

What's not in doubt is the Indonesian government's continued drive to steer its nickel sector further down the value-add chain.

"What needs to be promoted is exports of stainless steel, or at least nickel sulphate," one of the lawmakers currently studying the NPI capacity question told Reuters.

The comment captures a new truth about Indonesia's nickel industry.

The processing paths for nickel as a stainless alloy and nickel as a battery input have historically been different, but Indonesian operators are working on closing the gap.

Some are using high pressure acid leach technology to process ore into mixed hydroxide precipitate (MHP), which in turn can be converted into nickel sulphate, the preferred input material for battery-makers.

Others, including Tsingshan, are aiming to achieve the same goal by converting ore to nickel matte in a battery-friendly chemistry.

Such is the current scramble for battery material that reduced exports of ferronickel and NPI could simply mean more battery-grade nickel rather than more stainless steel.

Battery Tilt

The tilt towards battery products is already starting to show up in Indonesia's nickel trade with China.

China's imports of nickel matte have been modest in the past but have quadruped to 55,000 tonnes so far this year. A wholly new flow of Indonesian matte accounted for 41,000 tonnes of the January-June total.

Imports of Indonesian intermediate products, a category that includes MHP, became a regular feature of the two countries' nickel trade in April last year. Imports totaled 55,000 tonnes in 2021. This year's January-June count has already reached 156,000 tonnes.

Both products will be refined further into sulphate form for China's huge battery-manufacturing capacity.

Indonesia would rather China built its batteries in Indonesia and has been actively courting automotive companies such as Tesla with its mineral riches.

Its proposed export tax may hit hardest the flow of stainless-grade nickel to China, but it sets an ominous precedent for the still-incipient export flows of battery products.

Source: Reuters

Risk Warnings and Disclaimers

Comments

Add to Favorites

Damon

Jobs data will test the credibility of the Fed's latest pushback

Fed officials continue to push against any notion of losing their inflation-fighting focus. Further substantial hikes are still needed even after the cumulative 225bp tightening thus far. But it appears that the hawkish Fed talk is losing its reach out the yield curve with the 2Y-10Y UST curve now inverted by more than 35bp.

Markets will judge the hawkish Fed talk against the backdrop of data, one of the key inputs being today's jobs data. Judging by the 250k consensus job creation – while slowing – may remain strong enough to allow the Fed to keep lifting rates at a fast clip. But note a relatively wide dispersion of forecasts for the payrolls figure with anything between 50k and 325k deemed possible. The risks in the release appear skewed to the downside and there is a lingering sense of having topped out in the data. That is how we would read a 10Y yield struggling to put more distance to the 2.5% level.

Of course, next week's inflation data will still very likely show prices rising much faster than desired. A likely drop in the headline rate amid falling gas prices should provide some relief and add to the sense of topping out, though especially the core rate will continue to signal that the Fed's job is far from being done. That could keep the curve in a flattening mode for now.

The BoE hiked 50bp while forecasting a recession

US data holding up for now, and unemployment still falling may give the Fed room for its hawkishness. But it is the Bank of England yesterday that has shed a harsh light on central banks' optimistic notions that soft landings are possible, even if difficult.

The BoE delivered a larger (by its standards) 50bp hike yesterday. The market's reaction to the BoE was symptomatic of the broader backdrop where recession fears have come to dominate, with the effect of flattening yield curves. In fact, the 2Y-10Y Gilt curve briefly inverted for the first time since 2019 around the BoE decision.

The BoE itself forecasts a long recession by late this year and inflation falling below target later in 2024. As our economist points out, hiking in the face of such an outlook underscore how concerned the Bank is about current inflation dynamics and also indicates a willingness to sacrifice growth in order to get inflation under control.

Crucially, that forecast is premised on the Bank rate peaking at 3% as was implied by markets. It is a hint that market pricing of further tightening remains too aggressive. While the BoE itself reiterated its willingness to act 'forcefully' to curb inflation, the window to deliver more hikes is closing quickly. The next hike in September, even if possibly another 50bp increase, could also be the BoE's last before hitting the pause button on the hiking cycle.

By the end of the day, the Sterling Overnight Index Average curve still stood roughly 10bp below the previous day's close for the period late 2023 and beyond. But SONIA is still seen peaking close to 2.9% in early 2023, which leaves room for more downside correction.

Today's events and market view

Following yesterday's BoE decision, US markets should move back into the driving seat. The US job data takes the spotlight today. Markets will judge the credibility of the recent Fed pushback again on the strength of the labour market. While consensus is looking for a 250K increase in payrolls, the individual forecasts are widespread between 50k and 325k pointing to downside risks in today's release. In any case, our economists suspect that it will still be a lack of supply that holds back the payrolls increase.

The curve may stay in flattening mode, nonetheless, as markets will already eye next week's inflation data. The Fed's communication may lose its reach out the curve, but the grip on the front end remains relatively firm for now.

Source: ING

Risk Warnings and Disclaimers

Comments

Add to Favorites

Devin

The economic picture painted by the Bank of England of the years ahead was unremittingly grim: a long recession, high inflation, falling living standards. It would be hard to find a worse set of conditions for a government before a general election.

Threadneedle Street was taking plenty of flak even before it announced its latest gruesome forecasts. It can expect no letup now, because the government will need to find a scapegoat for the misery to come.

And there could be plenty of that. The fact that the Bank's monetary policy committee raised interest rates for a sixth meeting in a row came as no shock. More surprising was the downbeat nature of the predictions that accompanied the MPC's decision.

Inflation is now expected to peak at 13.3% in October – its highest since September 1980 – and will still be close to 10% in a year's time. The economy will begin to contract in the final three months of this year and not start to grow again until early 2024. Living standards will fall by 5% over the next two years – a drop unmatched since modern records began in the early 1960s.

Against this backdrop, the MPC pushed up interest rates by 0.5 percentage points to 1.75%. Not only was it the biggest increase in the official cost of borrowing since 1995, it was also the first time the committee has raised rates while forecasting a recession.

Eight of its nine members voted for a 0.5-point increase, on the grounds that the labour market remained tight and there was a risk of inflation becoming embedded. But the labour market is not expected to stay strong for long – the Bank thinks a recession, projected to last as long as those of the early 1980s and the late 2000s, will push unemployment from under 4% to well over 6% by 2025. Longer dole queues and higher interest rates will lead to a marked cooling in the housing market.

The forecasts are based on two assumptions: that the financial markets are correct to think interest rates will peak at 3% and that there will be no further government support for struggling households. Both are questionable. Some analysts think the economy is so weak the Bank will stop tightening after one or two more rate rises. There will certainly be more help with energy bills this autumn, whoever is prime minister.

Politically, the Bank has rarely been in a tighter spot. A year ago it thought inflation would peak at 4% but it has raised its forecast steadily ever since. Andrew Bailey, the Bank's governor, rejected criticism that the MPC had been asleep at the wheel and was now slamming on the brakes at exactly the wrong time. The Bank says higher energy prices, which alone account for half the 13% annual inflation rate, and global supply chain bottlenecks are responsible for most of the increase.

Bailey said pain was inevitable but it would be even worse if the Bank allowed inflation to take root. The MPC's warning that it will be "particularly alert to indications of more persistent inflationary pressures" means another half-point increase is possible next month.

Both Conservative leadership contenders said the Bank's forecasts supported their economic plans: in Rishi Sunak's case, that bringing down inflation was the number one priority; in the case of Liz Truss, that tax cuts were needed to fend off recession.

Truss, the frontrunner to replace Boris Johnson as prime minister, has been openly critical of Threadneedle Street. At the very least, she would order a review of the Bank's mandate – the legal obligation to hit the government's 2% inflation target – but she has been hinting at going further. For the first time since it was granted the freedom to set interest rates by Gordon Brown in 1997, the Bank's independence looks to be under threat.

Source: The Guardian

Risk Warnings and Disclaimers

Comments

Add to Favorites

Owen Li

Canadian employment likely returned to growth in July, Statistics Canada will show on Friday at 12:30 GMT, but the rebound may not be anything to celebrate. If that turns out to be the case, the figures could do little to alter investors' rate hike expectations, leaving the loonie under the U.S. dollar's influence.

Soft employment growth expected

After a contraction of 43.2k in June, employment in Canada is expected to have increased by 20k in July. Although a return to growth is always welcomed, such an addition could still be among the smallest this year, and not enough to press the unemployment rate further lower. Instead, analysts see the unemployment rate ticking up to 5.0% from 4.9% previously but remaining close to record lows. Will Canada's July Jobs Report be Important for the Loonie?_1

Will Canada's July Jobs Report be Important for the Loonie?_1

In a nutshell, the labor market is still quite tight and that might explain the marginal growth in job additions. The latest S&P Global manufacturing PMI survey has also witnessed the softest employment expansion in more than a year, citing restructuring proceedings, which led some companies to cut some workforce.

How could the BoC react?

The question that comes to mind now is how the data will affect the central bank's rate outlook. Following a surprisingly extraordinary 100 basis point rate increase in July, investors are now debating whether September's policy meeting will result in a reduced but still robust 75 bps or 50 bps rate hike.

If June's employment downfall unexpectedly extends for another month, sending preliminary warnings that boiling inflation has started to weigh on hiring, even if wages are still rising at a slower pace than prices, more investors could place their rate expectations on the less hawkish scenario. In this case, the loonie could decelerate, bringing the 20-day simple moving average (SMA) at 1.2910 per U.S. dollar under examination, while not far above, the 1.2950 resistance will be closely watched as well. A bigger miss in the data could see the greenback rallying towards the key resistance area of 1.3036 – 1.3083, especially if the U.S. nonfarm payrolls data due on the same day and time appear relatively more impressive.

Will Canada's July Jobs Report be Important for the Loonie?_2

In the positive scenario, where the economy creates more jobs than analysts forecast, the central bank could feel more confident to front-load its tightening cycle as inflation seems to be transforming into a more persistent phenomenon.

Housing market eyed

Of course, monetary tightening seems to be already draining the heat of the booming housing market, with home prices tumbling the most in at least 17 years in June. Though, the housing price index is still among the highest in more than a decade, while household debt still represents more than 100% of households' income. Will Canada's July Jobs Report be Important for the Loonie?_3

Will Canada's July Jobs Report be Important for the Loonie?_3

Therefore, although the falling housing market brings flashbacks from the 2007-2009 financial crisis, policymakers will probably prioritize their inflation mission if the labor market stands firm in the year ahead. Besides, given Canada's commodity rich economy, rising energy prices could create more revenues for businesses. That said, traders may remain patient and wait for August's employment report before they make up their minds about either a 50- or 75-bps rate hike in early September.

As regards the market reaction, the Canadian employment report will have to decisively beat market expectations and come in brighter than the U.S. nonfarm payrolls to squeeze dollar/loonie below 1.2800. In this case, the door will open for the 200-day SMA at 1.2731, while even lower, the 1.2640 constraining zone could come under examination ahead of the long term descending trendline.

Source: XM.com

Risk Warnings and Disclaimers

Comments

Add to Favorites

Owen Li

U.S. job growth likely slowed in July, but the pace was probably strong enough to keep the unemployment rate at 3.6% for a fifth straight month, offering the strongest evidence yet that the economy was not in recession.

The Labor Department's closely watched employment report on Friday is expected to paint a picture of an economy muddling through despite back-to-back quarters of contraction in gross domestic product, the broadest measure of U.S. economic activity. Though demand for labour has eased in sectors like housing and retail that are sensitive to the higher interest rates being engineered by the Federal Reserve in its battle against inflation, industries like airlines and restaurants cannot find enough workers.

"The labour market is no longer tinder box hot," said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. "But it remains pretty healthy and does not meet the National Bureau of Economic Research's broad definition of a contraction in the economy."

The NBER, the official arbiter of recessions in the United States defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators".

Still, government data last week showing a second straight quarter of negative GDP — which meets a popular rule-of-thumb definition for recessions — has fanned widespread debate over whether the U.S. economy is in fact in a downturn and has brought the employment report for July into even sharper relief for consumers, investors and policymakers.

Nonfarm payrolls likely increased by 250,000 jobs last month after rising by 372,000 in June, according to a Reuters survey of economists. That would mark the 19th straight month of payrolls expansion but would be the smallest increase in that span and below the first half monthly average of 457,000 jobs. Estimates ranged from as low as 75,000 to as high 325,000.

The cooling in job growth could ease pressure on the Fed to deliver a third straight three-quarters of a percentage point interest rate increase at its next meeting in September, though much depends on inflation and employment readings in the run up to that gathering.

The U.S. central bank last week raised its policy rate by 75 basis points and officials have pledged more hikes are coming as it tries to rein in inflation running at four-decade highs. Since March, it has lifted rates from near zero to their current range of 2.25% to 2.50%.

"A slowdown in job growth should be welcome news for Fed officials, but a more material loosening of labour market conditions will be needed to take the heat off wage inflation," said Lydia Boussour, lead U.S. economist at Oxford Economics in New York.

The economy contracted 1.3% in the first half of 2022, largely because of big swings in inventories and the trade deficit tied to snarled global supply chains. Still, momentum has cooled.

Hours worked, levels of temporary workers and the breadth of job growth will be closely watched for clues on how soon the anticipated recession might begin. The average workweek has been hovering at 34.5 hours.

Broad slowdown

The moderation in hiring was likely across the board last month. But government employment, which remained in the hole by 664,000 jobs in June, is a wild card as state and local government education has not followed typical seasonal patterns because of Covid-19 disruptions.

This could throw off the model that the government uses to strip seasonal fluctuations from the data.

"Normally, July state and local government education employment falls by 1 million," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "This may not have occurred this year, and a smaller than normal decline will cause the seasonal adjustment factors to inflate the adjusted data."

Economists are also eyeballing a possible drop in retail employment. High inflation — last measured at 9.1% year-on-year in June's Consumer Price Index — is forcing Americans to spend more on low-margin food products instead of apparel and other general merchandise, leaving retailers like Walmart Inc carrying excess inventory and issuing profit warnings.

But the rising cost of living and fears of a recession are forcing some retirees and others who had left the labour market to search for work. That has increased the supply of workers somewhat, keeping the unemployment rate steady near its pre-pandemic lows. Given 10.7 million job openings at the end of June and 1.8 openings for every unemployed person, economists do not expect a sharp deceleration in payrolls growth this year.

With the labour market still tight, average hourly earnings are forecast rising 0.3%, matching June's gain. That would lower the year-on-year increase to 4.9% — the lowest since December — from 5.1% in June. Though wage growth appears to have peaked, pressures remain.

Data last week showed annual wage growth in the second quarter was the fastest since 2001.

Economists will also keep an eye on employment levels reported in the report's more-volatile household survey, which had dropped by 315,000 jobs in June. The number of people working part time for economic reasons, will also be under scrutiny after plunging to the lowest since 2001 in June.