Crude Oil turns a loss into a rally as Chinese refiners stop exporting fuel

• WTI turns a loss into a rally from the $88.00 area as China halts fuel exports.
• US distillate inventories 14% below the five-year average, Crude Oil 2% above.
• A US diesel export ban could cut domestic refinery runs by as much as 12%.

The shortage pushing Crude Oil higher on Thursday is in diesel, gasoline and jet fuel, not in the barrels refiners buy to make them. Crude Oil has turned an early loss into a rally to near $91.50 since reports that China's refiners have stopped selling fuel abroad. In Asia, diesel now sells for about $75 a barrel more than the Crude Oil it's made from, roughly what a whole barrel of Crude Oil fetched in early August.

Beijing steadies fuel supplies, starting with China's

Chinese refiners have suspended fuel exports to everywhere except Hong Kong and Macau until Beijing says otherwise, people familiar with the matter said on Thursday. A state-owned refiner cancelled a handful of October gasoline and jet fuel cargoes on Wednesday, most of them deals it had agreed within the previous two weeks.

China started a week-long national holiday on Thursday without approving October exports. The same sources say whether approvals resume after the holiday ends on October 7 could depend on domestic fuel stocks and refinery output. The halt came less than a week after President Trump asked President Xi in Washington to help steady global fuel supplies.

China has the largest refining capacity in the world but usually exports less fuel than India or South Korea. The cancelled cargoes matter less than the reason trade sources give for the halt, which is a drop in China's own fuel stocks. Rebuilding those stocks takes Crude Oil, and Asian diesel margins at their highest in a week pay refiners everywhere to run harder.

The US has more Crude Oil than usual and 14% less diesel

Middle East Crude Oil exports rose in September to their highest since the war began on February 28. Saudi Arabia has also resumed loadings at its Red Sea port of Yanbu, which ships barrels without passing through Hormuz. US Crude Oil stocks rose 922K barrels in the week to September 25 and sit 2% above their five-year average, according to the Energy Information Administration (EIA).

Distillate stocks, which cover diesel and heating fuel, fell 2.3 million barrels over the same week to 14% below their five-year average. Gasoline stocks fell 1.7 million barrels. US refiners are short of fuel to sell rather than barrels to run, so the price of Crude Oil is moving with the price of diesel.

One consultancy estimates a ban on US diesel exports could cut US refinery runs by as much as 12% as storage fills within a month. On September 24, talk of a ban pushed US Crude Oil to its widest discount to the international benchmark since early May. A barrel a US refiner doesn't run has to find another buyer, which makes Washington's answer to the fuel shortage a risk aimed at US Crude Oil in particular.

The US average diesel price passed $6.50 a gallon for the first time in September, and the administration wants it lower before the November 3 midterms. Officials have been weighing voluntary export limits and wider sales of red-dyed diesel instead of a ban, and nothing has been decided. President Trump has publicly backed keeping US diesel at home, and the White House has asked the European Union to release its emergency diesel stocks to bring world prices down.

Iran's delegation leaves New York on a timetable both sides claim

Indirect talks with Iran in New York stalled on Monday. US officials say Secretary of State Rubio then ordered Iran's delegation to leave the country. Iran's mission to the United Nations says the delegation left on a schedule it had given the State Department on September 17. Qatar is still passing messages between the two sides, and Tehran hasn't announced a response to the latest US proposal.

US officials were reported on Monday to have offered sanctions relief and the release of frozen Iranian funds for concrete nuclear steps, and President Trump has since called the report untrue. Without a deal, traffic through the Strait of Hormuz stays far below its pre-war level, and the price of Crude Oil still includes the premium added when the war began on February 28.

Levels and bias

Resistance: Thursday's rally has stopped short of $92.00 so far. Friday and Tuesday both sold off from the $93.00-$93.50 area. Monday's spike to $95.00 fell short of the September 24 high near $96.00, itself well short of the September 15 peak near $102.00.

Support: Buyers stepped in just under $88.00 on Tuesday, Wednesday and Thursday. The 50-day Exponential Moving Average (EMA) near $88.50 sits just above that floor, and Tuesday's daily close beneath it lasted one session. The September 4 low near $87.00 comes next.

Bias: Lean long while buyers keep defending the $88.00 area, with $93.50 the first objective and Monday's $95.00 spike high the second. The daily Stochastic Relative Strength Index (Stoch RSI) is near 18 and still falling, at the bottom of its range without having turned up. The long is wrong on a daily close below $87.50, beneath the Tuesday-to-Thursday lows.

WTI daily chart