Delta weighs on oil demand and China’s recovery

Oil market update; China economic data

What happened? Last week the Brent crude price fell by US11 cents a barrel or 0.2 per cent to US$70.59 a barrel. But the US Nymex price rose by US16 cents or 0.2 per cent to US$68.44 a barrel.

Implications: Woodside Petroleum is scheduled to report its earnings tomorrow with a robust result expected by analysts. BHP today confirmed that it’s in discussions with Woodside over a potential $20 billion merger of its petroleum business, cementing Woodside’s position as one of the world’s biggest oil and gas companies.

China economic data: Retail sales expanded at an 8.5 per cent annual rate in July (consensus: +10.9 per cent). Industrial production grew at a 6.4 per cent annual rate in July (consensus: +7.9 per cent). Fixed-asset investment expanded by 10.3 per cent in the first seven months of 2021 from the same period a year earlier (consensus: +11.3 per cent). The unemployment rate lifted from a 2-year low of 5.0 per cent to 5.1 per cent.

Movements in energy prices can affect consumer spending, and in turn, prospects for retailers. The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it mean?

• Global oil prices were little changed last week as the fast-spreading Covid-19 delta variant clouds the near-term demand outlook for crude. While Sydney continues to grapple with rising infection numbers, the world’s biggest consumer of crude – China – has seen the virus spread to at least 17 provinces where a ‘COVID-zero’ approach by authorities has seen strict curbs on people movement to reduce infection numbers. Data from Baidu shows that traffic congestion levels in Beijing fell 20 per cent last week, raising international concerns about China’s near-term mobility.

• These concerns have led the International Energy Agency (IEA) to downgrade its crude oil demand outlook last week. The IEA said that demand fell by 120,000 barrels a day (bpd) in July and estimated that demand would ease by 500,000 bpd in the second half of 2021. OPEC+ producers also cut their forecast for crude demand in 2022. The downbeat forecasts come at a time when elevated gasoline prices in the US have prompted the White House to call on OPEC+ producers to boost oil production to reduce prices. According to Baker Hughes, US shale producers last week increased their oil rig count by 10 – the most in four months – in a sign that US explorers may be boosting growth.

• With the US Nymex price down around 10 per cent since its most recent high of US$76.07 a barrel on July 6, can Aussie motorists expect any relief at the bowser? Certainly, the cost of importing refined petroleum has eased in recent weeks. The benchmark Singapore gasoline price slid US84 cents or 1.0 per cent to US$82.47 a barrel last week. In Aussie dollar terms, the benchmark price shed 32 cents or 0.3 per cent to $112.40 a barrel or 70.69 cents a litre.

• Of course, retailers are continuing to defend their margins as extended lockdowns in Australia’s biggest cities reduce demand for petrol. The national average wholesale (TGP) petrol price stands at 138.1 cents a litre today, below the national average retail unleaded petrol price of 151.0 cents a litre recorded by real-time fuel app MotorMouth.

• Brisbane average unleaded pump prices have eased from all-time highs of 173.7 cents a litre last week to 164.7 cents a litre today, according to MotorMouth. Motorists should ‘top-up’ rather than fill up their tanks this week. But in Sydney, the retail discounting cycle has ended. Average retail unleaded petrol prices fell by just 20 cents a litre over 41 days, bottoming at 144.8 cents a litre. Drivers should fill up their tanks this week to beat the price hike. And in Melbourne, the average retail unleaded petrol price is 151.5 cents a litre today with prices expected to fall further this week as the discounting cycle continues.

• China’s delta variant outbreak is slowing economic activity. Government containment measures dented consumption with retail spending climbing at an 8.5 per cent growth rate in July from a year ago, down from the 12.1 per cent annual pace in June. Restrictions were stepped up after the outbreak, which began in Nanjing on July 20 and quickly spread to other regions.

• Production growth also slowed in July with industrial output rising 6.4 per cent from a year earlier in July, decelerating from an 8.3 per cent annual rate in June. Fixed asset investment increased 10.3 per cent in the first seven months of 2021, compared with a 12.6 per cent expansion in the first half of 2021. Devastating floods in major transport and logistics hub, Zhengzhou, disrupted industrial and agricultural production in July. And equipment maintenance affected oil refinery production, while crude steel production also fell late in the month.

• The delta outbreak has also hit China’s supply chains with container movements at Meishan terminal in Ningbo-Zhoushan port recently halted after a worker became infected. Supply chain disruptions could boost inflationary pressures for Chinese producers and global consumers of Chinese goods, handing policymakers another headache as the global economy loses momentum.

• Demand for Aussie commodities has remained resilient in the face of Chinese import duties and political tensions. Chinese demand for iron ore and grains were at record highs in June, but government intervention in the steel sector to cap prices and address environmental concerns have weighed on iron ore prices. The Singapore benchmark futures price is down around 28 per cent since its most recent peak of US$222.85 a tonne on July 7. And Global Ports data from Bloomberg shows that iron ore shipments from Australia dropped to 12.4 million tons in the week to August 6, from 16.7 million tons in the previous week. It was the lowest weekly level of iron ore exports since February.

What do you need to know?

Weekly oil market update

• Last week the Brent crude price fell by US11 cents a barrel or 0.2 per cent to US$70.59 a barrel. But the US Nymex price rose by US16 cents or 0.2 per cent to US$68.44 a barrel.

• The benchmark Singapore gasoline price slid US84 cents or 1.0 per cent to US$82.47 a barrel last week. In Aussie dollar terms, the Singapore gasoline price shed 32 cents or 0.3 per cent to $112.40 a barrel or 70.69 cents a litre.

• Last week the national average price of unleaded petrol rose by 2.3 cents to 153.4 cents per litre (c/l), according to the Australian Institute of Petroleum.

• The national average wholesale (TGP) petrol price fell by 1.2 cents last week to 138.5 cents per litre and stands at 138.1 cents a litre today.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 148.6c/l; Melbourne 151.5c/l; Brisbane 164.7c/l; Adelaide 141.0c/l; Perth 139.5c/l; Hobart 155.2c/l; Darwin 151.8c/l and Canberra 152.0c/l.

China economic data – July

• Retail sales expanded at an 8.5 per cent annual rate in July (consensus: +10.9 per cent), slower than the 12.1 per cent pace in the first six months of the year. Over the year to July, spending rose the most on petroleum (+22.7 per cent). But clothing sales decelerated to 7.5 per cent, smartphone sales were flat and automobiles sales fell 1.8 per cent. Online retail sales soared 21.9 per cent in the first seven months of 2021 from the same period a year earlier.

• Industrial production rose at a 6.4 per cent annual rate in July (consensus: +7.9 per cent), below the 8.3 per cent gain in June. Over the year to July, manufacturing output lifted by 6.2 per cent, electricity output jumped 13.2 per cent and mining production rose by 0.6 per cent. Production rose the most for pharmaceuticals (+25.3 per cent), but fell 8.5 per cent for auto manufacturing.

• Fixed-asset investment expanded by 10.3 per cent in the first seven months of 2021 from the same period a year earlier (consensus: +11.3 per cent) after expanding at a 12.6 per cent annual rate in the first six months of 2021. Over the year to July, investment by the private sector rose by 13.4 per cent and investment by state-owned enterprises increased by 7.1 per cent. By industry, investment rose most for railways/ships/others (+31.5 per cent), but investment in car manufacturing fell by 3.5 per cent.

• Property investment expanded at a 12.7 per cent annual pace in the first seven months of 2021 from the same period a year earlier (consensus: +12.9 per cent).

• The unemployment rate (nationwide survey-based jobless rate) lifted from a 2-year low of 5.0 per cent in June to 5.1 per cent in July (consensus: 5.0 per cent).

• China’s new home prices rose by 4.6 per cent in the first seven months of 2021 from the same period a year earlier.

Published by Ryan Felsman, Senior Economist, CommSec