Market News
Oil’s roundtrip back to $100. Why China could determine what happens next - CNBC
Key Points
- U.S. crude oil prices broke above $100 this week for the first time since May as fighting escalates in the Persian Gulf.
- Whether China ramps up its crude oil imports could decide if prices rally from here.
China will play a pivotal role in deciding whether oil prices sustain this week’s rally and potentially test wartime highs.
The U.S. crude oil price on Thursday topped $102 per barrel for its highest close since May. The futures contract surged about 50% from its summer low of $68.55 reached about three weeks after Washington and Tehran signed their now failed memorandum of understanding on June 17.
This week’s rally comes as fighting sharply escalated in the Middle East with Saudi Arabia’s crucial East-West oil pipeline shut down after multiple attacks.
The oil market has gradually restored a risk premium since the MOU collapsed and the U.S. reimposed its naval blockade of Iran in July, said Bob McNally, president of Rapidan Energy. But U.S. crude prices are still well below their April 7 wartime closing high of $112.95.
While the market has priced in the escalation in Middle East fighting, it may not have fully considered China increasing its imports, said Rebecca Babin, senior energy trader at CIBC Private Wealth.
“What isn’t reflected is the fact that we may actually see a stronger demand pull for crude as refiners start to really try to ramp up in China, tightening the market further,” Babin told CNBC’s “Squawk Box” Friday.
China’s crash diet
China has played a crucial role in keeping prices from skyrocketing during the Iran war by acting as a swing consumer. It has slashed its crude imports between 3 million barrels per day to 5 million bpd, McNally said. Beijing has a massive petroleum reserve of more than 1 billion barrels it can rely on.
“The biggest factor containing crude oil prices since this thing started is China’s crash diet,” McNally told CNBC’s “The Exchange” Tuesday. “It’s coming off the diet and it’s thirsty and it’s hungry — it’s starting to bid crude up.”
