Oil Breaches $100 as Gulf Fighting Escalates. China Holds the Next Move
By Aboki Forex —
US crude oil prices broke above $100 a barrel this week for the first time since May, as fighting escalates in the Persian Gulf. Whether China ramps up its crude imports could decide if prices rally from here.
The US benchmark topped $102 per barrel on Thursday, its highest close since May. The futures contract has surged about 50% from its summer low of $68.55, reached about three weeks after Washington and Tehran signed their now failed memorandum of understanding on June 17.
Pipeline shutdown tightens supply
This week's rally comes as fighting sharply escalated in the Middle East, with Saudi Arabia's crucial East-West oil pipeline shut down after multiple attacks.
Bob McNally, president of Rapidan Energy, said the oil market has gradually restored a risk premium since the memorandum collapsed and the US reimposed its naval blockade of Iran in July.
Even after the surge, US crude prices remain well below their April 7 wartime closing high of $112.95. Rebecca Babin, senior energy trader at CIBC Private Wealth, said the market has priced in the escalation in Middle East fighting, but may not have fully considered China increasing its imports.
"What isn't reflected is the fact that we may actually see a stronger demand pull for crude as refiners start to really try to ramp up in China, tightening the market further," Babin told CNBC's "Squawk Box" Friday.
China's crash diet
China has played a crucial role in keeping prices from skyrocketing during the Iran war by acting as a swing consumer. It has slashed its crude imports by between 3 million barrels per day and 5 million barrels per day, according to McNally. Beijing also has a massive petroleum reserve of more than 1 billion barrels it can rely on.
"The biggest factor containing crude oil prices since this thing started is China's crash diet," McNally told CNBC's "The Exchange" Tuesday. "It's coming off the diet and it's thirsty and it's hungry, it's starting to bid crude up."
That shift in Chinese buying is now the single biggest question mark over the market. If refiners there return in force, the extra demand would land on a market already short of Saudi pipeline capacity.
What it means for Nigeria
Nigeria earns the bulk of its foreign exchange from crude exports, so a sustained run above $100 would lift dollar inflows into the federation account and give the Central Bank more room to defend the naira.
The flip side is cost. Nigeria imports most of the refined petrol it consumes, so higher crude prices raise landing costs for marketers and put pressure on pump prices unless the exchange rate or subsidy arrangements absorb the shock. For businesses, the pass-through shows up in transport, diesel and logistics bills within weeks.