Assessment: This is a potential game-changer for energy markets and is likely to kick off a panic buying spree such as we saw in toilet paper and other household items in the early days of the pandemic.
- A confluence of bullish factors propelled oil prices to new multi-year highs this week
- The Chinese government has reportedly given state-owned energy companies a directive to secure winter energy supplies at all costs in response to recent shortages
- The last time oil prices were this high was back in early October 2018, right before prices crashed in the fourth quarter of that year, although the setup is much different this time
Spot oil prices continued their ascent this week, setting new multi-year highs in the process as a confluence of factors worked to bid up nearby futures. This recent show of strength is largely inline with our expectations and notably, oil prices have shrugged off news of a Chinese SPR release, a stronger US dollar, and a risk-off event with relative ease, continuing higher unabated.
Moreover, China appears to have made an abrupt and key policy change with respect to their commodity markets approach. To that end, recent reports are indicating that the central government there has given state-owned energy companies a directive to secure winter energy supplies at any and all costs. As many are aware, commodity inflation is soaring and pressuring large importers and particularly China, and at the same time, supply shortages are becoming more and more frequent across the globe. Up until now though, China was more focused on trying to pressure commodity and oil prices lower by releasing strategic reserves and tightening import licenses, however, things have changed.
Now the plan is to hoard all available supplies no matter the cost, to support continued economic growth, especially in a cold winter scenario.