Bullish Sentiment Building in Oil Markets

Chinese oilmen are in the midst of drilling the country’s deepest ever oil well.

Way out west, in the Xinjiang region, the plan is to spud a borehole as deep as 10,000 metres!

This ‘underground Mount Everest’ is set to drill through 145 million years of the Earth’s crust in an effort to find new oil and gas.

It’s all part of a plan to ramp up Chinese domestic oil production in much the same way as the US managed to do with shale oil over the past decade.

This chart shows how big a game changer that was for the US:

In less than 10 years, the US went from being an importer of energy, to a net exporter.

The Chinese would love that same kind of energy security.

But things aren’t going to be so easy…

Fossil fuels aren’t going anywhere fast

As OilPrice.com noted:

‘Unlike in the U.S., the development of shale gas resources in China is much more difficult due to more complex geography and a lack of adequate infrastructure to remote mountainous regions where most of the Chinese shale resources lie.

‘Drilling for shale gas in China requires deeper wells, while fracturing is also tricky because of the mountain terrain and geological constraints.’

Anyway, it appears they’re going to give it a red-hot go.

Energy security is always a big issue for Chinese planners, but recent tensions with the US have ramped things up a notch.

Coal is also still a big part of their long-term power plans, especially after severe blackouts in 2021.

Make no mistake…

Even as they pay lip service to a renewables transition, it’s clear that won’t come at the expense of energy reliability for China.

And that means fossil fuel use is likely to grow rapidly over the next two decades or so. Despite what the mainstream narrative says.

This is something my colleague Greg Canavan has been talking about for a while.

And he mentions a couple of decent ASX-listed coal stocks he’s got his eye on, in his new podcast What’s Not Priced in.

You can check that video out below.

But back to oil and why things are looking more bullish this week…

Debt deal boosts oil prices

The price of oil jumped 2% on Friday after the US debt ceiling issue was resolved and a positive jobs number surprise came out in the US too.

It was a double whammy for the bears as the economic data continued to surprise on the upside.

Furthermore, a heat wave in China right now is putting power grids under pressure as people in the big cities crank up the air con.

This is all putting some zip into the oil price.

Though, when you zoom out, the picture is a bit more muted:

Oil has trended lower from a high of US$122 down to a low of US$66 over the past 12 months.

We’re now at around US$72, so not far off the lows and nothing to get too excited about yet.

However, if the global economy is holding up better than expected, then perhaps the bottom is in?

While the China reopening fanfare has been a bit of a fizzer so far, it’s worth remembering that China is the second-largest consumer of oil in the world.

So what happens next in the Chinese economy is going to have a big effect on the marginal price of oil.

While it’s always hard to get an accurate read on the true state of things on the ground in China, the China Daily reported last week that:

‘Despite the challenges, Wen Bin, chief economist at China Minsheng Bank, said that China’s economy will likely expand at a faster pace in the second quarter due to the low comparison base in the previous year.

‘More efforts should be made to step up policy support such as reductions in the reserve requirement ratio and interest rate cuts, Wen added.’

If that’s what happens we could see Chinese ‘money printing’ make up for any further US tightening.

And that will be good for oil demand.

There’s also the other side of the equation to consider…

OPEC meeting cuts supply

Overnight, the OPEC group of oil producing countries agreed to extend current cuts of around 3.66 barrels per day (bpd) — this is around 3.6% of global demand — through to the end of 2024.

Furthermore, Saudi Arabia has also agreed to cut its oil production independently by a further 1 million bpd staring in July.

Amrita Sen, co-founder of Energy Aspects said:

‘It is a clear signal to the market that OPEC+ is willing to put and defend a price floor,’

If you believe the economy can finish stronger in the second half of 2023, there could be a good contrarian opportunity here.

Good investing,

Ryan Dinse,
Editor, Money Morning