Is This China's Next Step To Destroy The Dollar?

Authored by Byron King via DailyReckoning.com,

China is currently modifying the terms of its oil trade with Saudi Arabia. Specifically, China is working on a deal to pay for Saudi oil using Chinese yuan. This effort poses a direct threat to the security of the dollar.

If this China-Saudi deal happens — yuan for oil — it’s another step closer to the grave for the petrodollar, which has dominated global finance since 1974. You can revisit Jim Rickards article about the Assault on the Dollar, here.

To recap, the petrodollar is weakening because the dollar is losing power as the world’s reserve currency. This is similar to the way pounds sterling gradually fell out of favor during the decline of the British Empire. The decline may take a long time, but what we’re seeing today is another step in the death march of the dollar.

Since 1974, Saudi has accepted payment for almost all of its oil exports — to all countries — in dollars. This is due to an agreement between Saudi and the U.S., dating back to the days of President Nixon.

Beginning about 15 years ago, China ceased being self-sufficient in oil, and began buying Saudi oil. As per all Saudi customers, China had to pay in dollars. Even today, China still pays for Saudi oil in U.S. dollars and not yuan, which perturbs China’s leaders.

Since 2010, China’s total oil imports have nearly doubled. According to Bloomberg News, China has surpassed the U.S. as the world’s largest oil importing nation. Here’s a chart, showing the trend.

As China imports more and more oil, the idea of paying for that oil in yuan instead of dollars becomes more critical. China does not want to use dollars to buy oil. So, China is beginning to squeeze Saudi over the form of currency in which their oil trade is conducted. China is doing this by steadily lowering its oil purchases from Saudi.

Presently, China’s three top oil suppliers are Russia, Saudi and the West African nation of Angola. Backing-up these three key suppliers are a combination of sources in Iran, Iraq and Oman, which help to diversify China’s oil-supply chain.

In the past few years, China has shifted oil purchases away from Saudi, and Russia’s oil exports have risen from 5% to 15% of the Chinese total.

China imports more oil from Russia, Iran, Iraq and Oman; less from Saudi.

Saudi’s share of Chinese imports has dropped from over 25% in 2008, to under 15% now. Meanwhile, Saudi competitors Russia, Iran, Iraq and Oman are selling more oil to China.

Saudi would like to reverse this declining trend of oil-trade with China. However, these kind of major oil flows don’t just happen in a vacuum.

There’s a good reason why Russian oil sales to China are increasing. As you’ll see in Nomi’s article, trade and financial services are often closely linked. Over the past few years, China has deepened its trading roots with Russia — now, China pays for Russian oil in yuan. Russia, in turn, uses yuan to buy goods from China.

Beyond trade in goods, within the past six months Russia has set up a branch of the Bank of Russia in Beijing. From there, Russia can use its Chinese yuan to buy gold on the Shanghai Exchange. In a sense, Chinese-Russian oil trade is now backed-up by a “gold standard.”

Looking ahead, Saudi Arabia will find itself more and more locked-out of the Chinese oil market if it won’t sell oil for yuan. But to do this, the Saudis must move away from U.S. dollars— and from petrodollars — if Saudi wants to maintain and increase access to China’s oil market.

We’ll know more about the likelihood of this after Donald Trump’s tour of the Middle East.

If Saudi begins accepting yuan for oil, all bets are off on the petrodollar. Yuan-for-oil will entirely change the monetary dynamics of global energy flows. I expect the U.S. dollar to weaken severely when that news breaks.

Much of this oil-for-yuan news is public information. Yet, for some strange reason, there’s a form of blindness within western policymaking and media circles concerning the implications of yuan-for-oil. The idea is so “off-the-wall” that many policy leaders simply ignore it.

Ignore away. But we could wake up one morning in the midst of a massive currency crisis, in which dollar values are falling and oil prices in dollars are soaring.

Is This Saudi Arabia's Newest Strategy To Boost Oil Prices?

Submitted by Nick Cunningham via OilPrice.com,

OPEC’s new strategy to balance the oil market is to cut oil exports to the U.S., a move intended to drain near-record-high crude oil inventories.

OPEC originally thought that six months of combined production cuts would be sufficient to balance the oil market, but the market still looks oversupplied. Not everyone agrees on this. The IEA has argued that we probably have already reached “balance,” which is to say, demand has caught up with supply. The energy agency says that the market is moving into a supply deficit situation in the second half of this year, if it hasn’t already.

But the problem is that the one metric that OPEC officials themselves have held up as the key barometer to watch is the level of global crude oil inventories, rather than the immediate supply/demand balance. And on that front, they sort of shot themselves in the foot by ramping up exports just ahead of the implementation of the cuts late last year.

Elevated exports in November and December meant that huge volumes of oil started reaching U.S. shores in January. It is no wonder that U.S. inventories surged in the first quarter. The flood of oil set back OPEC’s efforts right off the bat, and even close-to-100-percent compliance on the production cuts was not enough to drain inventories at the speed needed to declare victory by June.

The huge increase in U.S. inventories means that OPEC needs six months just to get inventories back to where they started at the end of last year. “Producers unintentionally accelerated activities that would ultimately obstruct, and for a period reverse, the very rebalancing they were trying to accelerate,” Ed Morse, head of commodities research at Citigroup, said in April.

(Click to enlarge)

So, here we are, back at the starting line, this time with a promise of nine more months of cuts. OPEC’s strategy this time around is to directly target U.S. inventories, rather than simply taking barrels off of the global market. "Exports to the U.S. will drop measurably," Saudi energy minister Khalid Al-Falih told reporters after the OPEC meeting last week. Some sources familiar with the Saudi strategy told Bloomberg that Saudi oil exports to the U.S. will drop below 1 million barrels per day in June, a reduction of 15 percent below the average so far in 2017. If the Saudis keep exports below the 1 mb/d threshold, it will be the lowest level of exports to the U.S. in years.

In a global marketplace, why does it really matter where the Saudis send their oil? In terms of global supply, a barrel sent to Asia is the same as a barrel exported to the U.S., so what’s the point of targeting the U.S., specifically?

The logic is that the U.S. has nearly real-time data on crude oil storage, unlike most other places in the world – data that is publicly available. Some analysts believe that oil inventories have been falling around the world for quite a while even as they climbed in the U.S., but because the markets pay close attention to U.S. data, the increase in U.S. inventories in the first quarter weighed on sentiment and prices. After all, nobody really knows what is going on with storage levels in China, for example.

But precisely because the U.S. has transparent data, Saudi officials believe that they can provide a jolt to the market but attempting to put a dent in storage tanks along the U.S. Gulf Coast. The strategy could have some merit. "The market has been given clear independent and verifiable metric of how Saudi cuts -- and hopefully broader OPEC -- are working out over the summer,” Amrita Sen, chief oil analyst at Energy Aspects Ltd., told Bloomberg.

It will take a bit of time for the effects to be felt. The typical transit time for an oil tanker from the Middle East runs from 35 to 55 days, according to Bloomberg, which means that the U.S. import data should start showing some signs of the strategy by mid-July. If imports drop off, that will mean more oil will have to be drained out of storage. When that occurs, oil traders will grow more confident that the market is on the mend.

Of course, if Saudi Arabia simply reroutes some of those exports to Asia, then inventories in Asia could rise. But, because the data is poor, the markets might not realize that the barrels originally destined for U.S. shores are not actually coming off the market but are turning up elsewhere.

WTI/RBOB Surge After Massive Gasoline Draw (Despite Record Crude Glut)

Following API"s reported massive build in crude (and draw in gasoline), DOE confirmed the extreme moves with a major 8.2mm crude build and a massive 6.56mm draw in gasoline (the biggest since April 2011). US Crude production rose once again - to 13-month-highs.

API

• Crude +11.6mm (+1.4mm exp)


• Cushing +788k


• Gasoline -5.00mm


• Distillates -2.9mm

DOE

• Crude +8.21mm (+2mm exp)


• Cushing +867k (+406k exp)


• Gasoline -6.56mm (-1.99mm exp)


• Distillates -925k (-1mm exp)

This is the 9th weekly rise in crude inventories (some chatter on API data including SPR barrels but that was marginal at best compared to the headline print)...The gasoline draw is the biggest since April 2011

Notably West Coast (PADD 5) CRUDE STOCKS INCREASE 4.65M BBL, MOST SINCE OCT. 1999 ..

Bloomberg"s Bert Glibert notes that based on bill of lading data, the biggest sources of waterborne barrels to PADD 5 last week were Ecuadorian Napo and Kuwait Crude oil.

This is a new record high for US crude inventories...“Inventory drawdown slower than I thought after cuts,” Saudi Arabia"s Khalid Al-Falih admits.

Putting the 2017 surge in context, commercial crude stocks are now up 49 million barrels YTD, compared to 38 million in 2016 and a 22MM average over the past decade according to Reuters.

In the last week, oil imports accelerated to 8.15MMbpd from 7.6MMbpd the week before.

However, offsetting the spike in crude imports, gasoline imports fell to the lowest level since 1999.

As a result, gasoline stocks declined by 6.6mmbpd to 249 mm barrels, although still well above the 10 year median for this time of the year.

Distillate stocks likewise dipped modestly in the last week, although remain at the higher end of the last 10 year range as the following Reuters chart shows:

Meanwhile, US crude production continues to trend higher with lagged rig counts, even as Saudi oil minister Khalid Al-Falih had complained that “the green shoots in the U.S. are growing too fast.” In the latest week, US Crude production rose by another +56k b/d, or +0.6% W/W to 9.088MMbpd

This means that US oil production, which is again rapidly rising on leaner, more efficient production technologies, is now just 5.5% below its lifetime high, a level it will surely overtake rapidly should the price of crude not tumble from current levels.

And as a reminder, the EIA published another bullish outlook for U.S. oil production in yesterday"s Short-Term Energy Outlook. It raised the 2017 year-on-year increase in crude and condensate production to 330,000 b/d from its previous assessment of just 100,000 b/d and now sees output above 10 million barrels a day by the end of 2018. Rebalancing the market is getting more difficult.

Notably the RBOB bounce (on API inventory draw) had been largely erased before the DOE data (and WTI had extended losses)...but the better than API crude build and huge gasoline draw triggered panic buying...

Bloomberg"s Vince Piazza warns U.S. inventories across the product value chain remain elevated, with crude oil 39% above the five- year average and distillates, jet fuel and gasoline between 5.5% and 22% higher. This, along with the 51% rebound in rig count since last year, and the robust level of more than 5,300 DUCs (drilled yet uncompleted wells) implies the near-term return of U.S. hydrocarbon volume with an environment of lower range-bound prices.

It appears traders are starting to realize...