Asia Oil: Strong China demand remains critical to ongoing oil recovery

Brent lagged slightly as commodities reflated across the board yesterday on the back of last week's Fed meeting at Jackson Hole. Iron ore and other hard commodities led the reflation trade surge after China's services sector grew at its fastest pace over two and a half years in August. 
 
Strong crude demand from China has been one of the most critical pillars in the ongoing recovery in oil markets, especially with the largest oil consumer of all, the US, still struggling to recover from the negative demand implications of the coronavirus economic beat down. 
 
Despite the hard commodity reflation bounce, which oils were coat-tailing yesterday, China's crude imports in September are set to fall for the first time in five months as Chinese oil buyers struggle with tank tops. While China is eager to buy at the current price as its ongoing economic recovery takes root, they have nowhere to store it. As a result, most traders expect Saudi Armaco to cut Asia Arab light grade by $1 for October delivery, which provides the poor short term optics. 
 
Central banks are expected to top up the policy punchbowl for years to come, offering up a hefty policy backstop. Over the short term, the upbeat reading on China's service sector should simultaneously augur well for oil price recovery. This suggests dips will be bought as back end contracts remain in demand due to Fed policy and the prospects of a weaker US dollar. Still, volatility and price moves in the front end have been historically confined to pretty tight ranges after weeks of nothing but crickets. I suspect traders remain snared between the often shifting short term health risk triggered oscillations and more bullish longer-term dynamics.

Due to the rolling lockdowns in the Sun Belt states, oil market rebalancing slowed sharply this summer and demand stalled as the virus spread more aggressively in the US, complicated by Chinese imports slowing. So, given the shaky current fundamentals, any cross-asset sell-off or "risk-off" event – big or small – could still lead to a short-term spot sell-off. Indeed, this is likely why oil prices remain harnessed to general risk sentiment and probably why the complex is trading down this morning.
 
As always, focus remains on the near-term pace of the global economic recovery and the supply/demand dynamic. Risks in the near-term remain skewed to the downside, given rising supply from OPEC and health risk demand uncertainty continuing to cap prices. But with the vaccine hoped to be rolled out by spring, the medium and longer-term outlook points to a tightening market and higher oil prices.