The oil markets have fallen back from the $50 per barrel mark due to questionable Chinese demand and an expectation of early restoration of supply outages. Crude is currently entering a corrective phase, which could take it down to $42 per barrel and lower.

The sharp rise in crude prices were supported by large supply outages in Canada, Nigeria, Libya and Venezuela—disruptions that removed 3.5 million barrels per day of oil from the markets, quickly turning the supply glut into a deficit.

It was accepted that the Canadian supply would be back on track quickly after the wildfires, but there were serious doubts that the supply would rebound in Nigeria, Libya, and Venezuela. However, news about a rise in production in Nigeria in June and reunification of Libya’s National Oil Corp. under a single management weakened the resolve of the bulls to push prices higher.

Nevertheless, bears too were uncertain after fresh rounds of attacks in Nigeria by the Niger River Delta.

Along with the restoration of these supplies, the demand outlook for China is looking clouded.

Though China imported 39 percent more crude oil in May compared to last year, part of this increase is attributed to the teapot refineries in China as well as stockpiling by China. Related: Breakthrough In Oil Sands Tech Could Transform The Industry

Fifteen percent of the increase in Chinese crude oil imports between January and April were consumed by the teapot refineries, says Citigroup.

However, China doesn’t consume all the crude that is converted into gasoline and diesel. The Chinese state-owned refineries mainly export diesel, and the teapot refineries contribute to the gasoline exports.

China’s daily gasoline exports during the first four months of the year were higher by more than 30 percent compared to last year, according to Energy Aspects, reports The Wall Street Journal.

Compared to the previous years, when China used to be a net importer of refined-oil products, this year it has been a net exporter in all months, as seen in the chart above.

China’s apparent oil demand contracted by 1.3 percent in April 2016, which was the third consecutive month of negative growth led by a slowdown in demand for gasoil and fuel oil, according to S&P Global Platts.

Gasoil, which is used in the industrial and heavy transport sectors, has witnessed a considerable slowdown, mirroring the slow growth in China. Related: Lockheed Tech Breakthrough Is About To Revolutionize Oil Exploration

"Despite the fact that refineries have reduced domestic gasoil production by 2 percent on a year over year basis in 2016, exports have more than quadrupled during the same period, at the same time refiners have reported sluggish domestic sales of gasoil," said Song Yen Ling, senior analyst with Platts China Oil Analytics, reports PR Newswire.

Analysts at JPMorgan Chase & Co. believe that China is close to filling its strategic oil reserves by August of this year, which will lead to a 15 percent reduction in imports.

“China has taken the opportunity of lower oil prices since early-2015 to accelerate the strategic petroleum reserve builds,” Wang said in the report. “This volume might be close to the capacity limit, in our view, and together with potential teapot utilization pullback and slower-than-expected demand from China could increase near-term risks to global oil prices,” reports Bloomberg.

Supply restoration and a drop in Chinese demand can tip the oil markets back into a glut. Oil prices will have to wait before they can cross back above the $50 per barrel mark. The next 10 percent move in oil should be down rather than up.

By Rakesh Upadhyay for Oilprice.com

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