Oil drops on China intervention to ease coal crunch

October 20, 2021: Oil prices turned down after the Chinese government flagged it was looking for ways to tame record high coal prices and that it would ensure coal mines operate at full capacity as Beijing moved to ease a power shortage.

Chinese coal prices and other commodity prices slumped in early trade, which in turn pulled oil prices down from an uptick earlier in the day.

Oil markets had hit multi-year highs earlier in the week on the back of a global coal and gas crunch, which has driven a switch to diesel and fuel oil for power generation.

"Ultimately, China's coal output needs to increase to remedy its energy woes," Commonwealth Bank commodities analyst Vivek Dhar said in a note.

U.S. West Texas Intermediate (WTI) crude futures fell 30 cents, or 0.4%, to $82.66 a barrel at 0316 GMT, reversing most of a 52-cent gain from Tuesday.

Brent crude futures dropped 43 cents, or 0.5%, to $84.65 a barrel, paring a 75-cent rise in the previous session.

The China Electricity Council said late on Tuesday China's National Development and Reform Commission (NDRC) discussed government intervention in coal prices at a meeting of key coal producers. 

In a separate statement, the NDRC said it would ensure coal mines operate at full capacity and aim to achieve at least 12 million tonnes per day of output, which would be up more than 1.6 million tonnes from late September.

The market was also pressured by data from the American Petroleum Institute industry group which showed U.S. crude stocks rose by 3.3 million barrels for the week ended Oct. 15, according to market sources.

That was well above nine analysts' forecasts for a rise of 1.9 million barrels in crude stocks, in a Reuters poll.

However, U.S. gasoline and distillate inventories, which include diesel, heating oil, and jet fuel, fell much more than analysts had expected, pointing to strong demand.

Gasoline stocks fell by 3.5 million barrels compared with analysts' forecasts for a drop of about 1.3 million barrels, while distillate stocks fell by 3 million barrels, compared with forecasts for a drop of 700,000 barrels.

Data from the U.S. Energy Information Administration is due on Wednesday.

Reuters