Oil Prices Are Back Down Again

Prices for benchmark crudes (WTI, Brent, and Dubai) are back down into the high 90's.

The big drop is a reflection of the fact that both the supply and demand for crude are inelastic. So all the volatility is in P rather Q. 

And somehow pressure was relieved this week: either supply shifted to the right, or demand shifted to the left. It appears to be the latter. It's probably unwise to think this will be the new normal.

This does not seem to have much to do with the situation in Ukraine. Well, maybe a little: negotiators between Ukraine and Russia sounded a little more hopeful yesterday.

A bigger factor is that COVID-19 is flaring up in China again, with their largest lockdowns since this all started in early 2020 (also see "China's COVID Lockdowns Set to Further Disrupt Global Supply Chains" which The New York Times appears to be making freely available). 

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China does not have a lot of oil, so they are the world's biggest importer (they produce 20% of what we do, for an economy of comparable size). They are the second largest consumer of oil, and the second largest refiner, although they don't export too much (remember, it's a low margin business, and the first thing you do is refine close to the source and then sell close by too). If you're curious, I found this accessible short article with graphics for most of this; recommended.

But recall that most oil isn't stored much — it goes ground to refinery to consumption fairly quickly. China is about halfway through a long committed investment (in the 20-30 year range) designed to increase its oil storage capacity to about a 100 day supply. 

Numbers out of China are always sketchy, but estimates were they were up to 280 million barrels in storage capacity about 6 years back. Current estimates are that they can store enough oil for 40-50 days worth of imports. At 12 million barrels/day of imports, that's in the 500-600 million barrel range. It is believed this storage has been filled as soon as it's built. That's about what the U.S. can store, but we've got a lot more coming out of the ground, so we have less need.

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BTW: this is a good example for the stock-flow arithmetic. With round numbers:

(600M barrels)/(12M barrels/day) = (600M barrels)(day)/(12M barrels) = 50 days

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In other news, there's this tidbit: Saudi Arabia might start selling some of oil it sends to China for yuan instead of dollars.