Oil declines on expected stocks build in the US and China’s coal policy - Rystad Energy

Here is Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson:

Traders are today pricing in the first bearish developments for the oil market in a while, the expected build in US crude stocks and China’s intent to normalize coal prices – which in turn will limit coal to oil switch for power generation.

Prices are declining today and the depth of the dive will very much depend at the definite report by EIA, which will reveal the exact net addition in oil storages last week.

Even if today’s report indicates bearish crude builds, stock levels at are still at their lowest level since October 2018, so a swell today shouldn’t knock the oil price down too significantly, speaking in strictly physical market terms.

China, hit by the energy supply crunch, is seeing its economy threatened by current fuel prices and its intent to streamline coal supply and lower its value is both an indication of how critical fuel prices are for an economy’s growth and how important role fossil fuels still have in the power mix.

Given the current volatility in the market and the influence of other financial and macro sentiments, a bearish reading today could very well provide some temporary softness to oil prices, though this step down will likely be short-lived as long as the energy crunch looms prominently.

The energy crunch is here and has brought record-high prices across the commodities spectrum, but so far there hasn’t been a decisive policy response from governments on damage control.

The US and Japanese governments have both called for more production, but this is largely out of their control, and most producers are hesitant to ramp up production to meet a short-term demand boost, only to shut-in wells in 2022 when global supply is forecasted to catch up with demand.

Any impactful policy to manage the energy crunch would likely have to include energy tax subsidies and if the energy crunch turns into a crisis, potentially export bans.

South Korea is mulling lowering taxes on oil products in order to keep consumer demand robust, but this would come at a cost to revenues feeding into other social spending programs, which are also needed to drive economic growth.

The balance between keeping oil products affordable and maintaining momentum in economic activity at this point seems paradoxical, something will have to give on either side.

And if the supply crunch proves to be transitory, then any extreme policies to fix the energy crisis risks choking economic growth in the longer term. This is why temporary tax relief, instead of monetary tightening, could be a short-term fix with fewer adverse GDP effects.

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