Starting just before 10am ET, oil staged a remarkable surge, rising from sessions lows of $44.50 to $46.50 in the matter of minute, a remarkable levitation which helped trim the overall market's losses by more than half which pushing Treasury yields modestly higher.
While there was no immediate catalyst for this stunning price spike - some have cited falling Saudi exports which dropped half a million barrels to 7.25mmb/d thanks to lower flows to the U.S. and China, but that makes little sense as i) that was already priced in as part of the latest oil output cuts, and ii) the US is only importing less as a result of its own record production - overnight news which flew under the radar may have something to do with the surge in oil.
Readers will recall that last week, the shares of Asia's largest petroleum refiner Sinopec plunged following reports that two senior officials at Unipec, the trading subsidiary of Sinopec, had been dismissed by their Communist Party overseers following major losses on soured bets related to oil prices. While Sinopec confirmed the suspensions saying only they were related to work matters, it only said that Unipec had "made some losses" from crude trading because of a drop in prices, but didn’t link the two.
And yet, overnight Bloomberg reported that in a confirmation that this particular story may have a lot of room to run, China’s state assets regulator was checking on the financial status of derivative trading accounts at some major state companies following the Unipex losses, citing people with knowledge of the situation.
Specifically, as the Bloomberg source revealed, confirming that quietly Beijing is increasingly concerned afraid potential oil price contagion, the State-Owned Assets Supervision and Administration Commission would inspect accounts of companies with derivative trading operations following the Unipec loss, with said inspections said to focus on the profit/loss status of commodity hedging positions.
In other words, Beijing is worried that the Unipec losses may lead to some form of contagion, however good luck to anyone finding out just what has China's top power echolon freaked out.
However, since Bloomberg adds that some meetings with state-owned oil companies to collect data on trading books have already been held, it is only a mater of time before someone leaks just why China is suddenly worried about oil prices. In the meantime, the best remedy to avoid risk is to simply ramp oil higher, and that's precisely what we see going on right now.