"Hoarding" and short term oil price volatility
The recent pullback in front-end oil prices is likely to remain for a short period of time. Hoarding is to blame. The Chinese government revises petroleum product prices every 30 days or so. The required increases in the past months has led to the phenomenon of “hoarding”, as participants in China buy large quantities of oil in anticipation of a price increase to match international prices. This practice has led to an increase in oil purchases of 3million barrels per day from May to June, which justified the increase to $68/barrel. Once this “hoarding” cycle is over, the recent pullback is easily justified. Hard to envisage a large increase in short term demand to offset this extraordinary buying activity, but there is certainly a “short covering” effect likely to cushion the fall. Oil has not risen to stratospheric levels and is still in reasonable levels considering average production costs, so the funds that have shorted into the hoarding cycle will likely unwind their trade gradually.