Oil Heads Towards $120: China Returns and US Reserves Drop

Oil Eyes $120: China Returns as Reserves Deplete

Paper oil plummets on screens while physical crude becomes increasingly expensive. The barrel for immediate delivery is trading at a premium of between $13 and $15 over the six-month contract, an anomaly rarely seen in a well-supplied market. Those who only look at the headline see relief; those who look at the spread see scarcity. And from there comes the repeating figure: $120.

Why is Today's Crude More Expensive Than in Six Months?

Standard logic dictates that the future should be worth more: storage costs money. When the opposite occurs, the market is signaling a lack of product. This has been observed in recent weeks, with immediate delivery Brent rising 20% while the general benchmark fell 9%, and the one-month to six-month spread widening another 14% amidst a price correction.

Some analysis suspects short positions peine on WTI around $70, concentrated during low liquidity hours. This is speculation, with no proof of who is behind it. The more grounded argument is that diesel gallons aren't printed, no matter how much a future is manipulated.

China: From Leaving the Market to Full Return

The data that surprised everyone came with China's June crude imports: 29 million tons, equivalent to 7 million barrels per day, a 41% year-on-year decrease and the lowest level in ten years. Month-on-month, the drop was 12%; year-to-date, 47%, with 26 million tons evaporated.

The second factor was refining. Crude processing in China fell 18% year-on-year in July, the worst performance since the pandemic. This removed about 5.8 million barrels per day from the market, nearly 6% of global supply. The world's largest buyer had left the party without notice. The open question is what happens when it returns, because consumption hasn't been destroyed; it has been postponed.

Strategic Reserves at 40% and a Winter Ahead

The other front is ammunition. US strategic reserves are reportedly around 40% of capacity, with winter approaching and an ongoing conflict. If true, the margin to draw from storage and cool prices narrows just when it's most needed. Deadlines set in July have been pushed back by two months; depletion is postponed, not avoided.

Add the political calendar: elections in Israel on October 27th, US midterms in November, a Federal Reserve decision, and a summit between Xi and Trump on the horizon. For the market: no one with the power to move prices has an incentive to let the barrel surge during a campaign period.

Refining, Majors, and Dividends: Where the Money Is Going

The squeeze isn't just in crude. The low-sulfur diesel sustancia ilegal spread reached $108 this month, compared to the usual around $20. There's ample refining margin for those with installed capacity.

Among oil companies, Marathon Petroleum has drawn significant discussion: a P/E ratio of 10.8, refining capacity near 3 million barrels per day, 94% utilization, and $2.8 billion returned to shareholders in the quarter, with refining margins doubling to $36.33 per barrel. The issue is that these $36 are not sustainable, and the stock has already priced this in. The breakdown with its three entry points—of which we only give the key figure here—marks the difference between buying cheap and buying the narrative.

Further down the spectrum are the generous dividend majors, the Hungarian state oil company, or the crude ETF sold when the barrel gets expensive. No one hides the risk: the temptation to buy at highs for antiestéticar of missing out is the retailer's worst enemy.

The target has shifted from $120 to $130 after Oman crude reached $140, and some are already forecasting $180 before 2027. With reserves at 40%, China returning, and unrelenting geopolitics, the question isn't if the barrel will rise. It's how long it will take, and who can withstand the volatility until then.