How important is China to commodity markets?

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After last week’s EIA inventory report showed an increase in crude inventories funded by higher refining / imports, last night’s decline of 7.3 million barrels from API report says we should see a pretty big EIA draw this morning. After last-minute massive sell-offs of US equities last night, risk appetite picked up and dusted again, and is looking to rise again today. The raw complex looks just as upbeat at first glance.

Chinese stocks again ended lower last night after hovering between green and red more than 40 times, while the latest attempt to stabilize the situation came from the People’s Bank of China, which injected 22 billion dollars in the financial system to try to get things up.

The Rbob gasoline contract costs less today, despite the expectation of a drawdown of around 1 million barrels in today’s inventory report. The good news out of the Whiting refinery is helping to put downward pressure on gasoline, while rumors and whispers of refinery outages elsewhere are unable to counter this downtrend. Whiting restarted its crude unit after leaks caused the 240,000 bpd unit to shut down on August 8. While there will only be a gradual ramp-up of Whiting’s fuel production, its return is still well above expectations, initially set for late September.

As crude prices revisit their lows seen earlier in the year, we see corresponding weakness in a plethora of currencies. As the image below illustrates, currencies that are heavily dependent on oil exports are at the mercy of black gold, Texas tea movements. Therefore, there’s a lot of clobberin ‘on: Related: A Winter of Unhappiness for Russia

The focus remains on China, and in particular the crude complex, given the relationship between worsening sentiment towards the Chinese economy and a corresponding drop in oil prices. The graph below shows how China is a real monster in terms of commodity consumption. As this WSJ article points out, China now buys about one-eighth of the world’s oil, one-quarter of its gold, one-third of its cotton, and about half of all major base metals: Related: The Real Long-Term Threat To The Oil And Gas Industry

Related: Why Today’s Oil Drop Doesn’t Look Like The 1980s

While China is constantly on our radar, geopolitical tensions seem to be constantly absent. If you’re looking for a black swan in today’s crude market to jack up prices, look no further than signs of social unrest in some petro-states. This NYT headline sums it all up pretty well: “As prices descend from Venezuela to Iraq to Russia, oil price declines raise fears of unrest.”

Meanwhile, cracks continue to appear in the oil and gas industry, leaving room for consolidation; the latest is Schlumberger (the world’s largest oil services provider) agreeing to buy oil equipment company Cameron for nearly $ 15 billion.

Finally, if you need a little relief, here are the ten best jokes from Edinburgh’s fringe festival, as a lady from Missouri saw Donald Trump’s face… in a pot of butter.

By Matt Smith

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