China’s oil stockpiles are near a record despite the return of traffic jams and rising industrial activity. America’s inventories are slumping even though people don’t seem to be driving much. OPEC and allied producers are still withholding millions of barrels from the global market to avert a glut, but there are indications some exporters are wavering in their commitment to the pact.

The oil market, whipsawed by some of the most violent ups and downs in its history in the first of half of the year, is a muddle of contradictions as traders size up prospects for the rest of 2020. As prices stick to a narrow range near $40 a barrel, some of the biggest commodity houses including Vitol Group, Trafigura Group and Mercuria Energy Group have diverging views about what’s next.

The most important factor will be Covid-19 itself: cases are surging again in the U.S. and Europe, two vital demand centers. While Asia, in particular China, is faring better in terms of how the disease is being coped with, the economic impacts of the virus will nevertheless be felt for years. And, what about a vaccine? Goldman Sachs Inc. says it’s worth betting on jet fuel prices strengthening because one will likely be found and people will start flying again. Should jet fuel surge, then one of the great weaknesses of the current global oil market—diesel—would get a sudden boost, alleviating huge amounts of pressure on the world’s refiners.

“The market is stuck,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. “For prices to rally, OPEC+ spare capacity needs to drop, and to see that, demand needs to recover further. As long as there’s not a second global lockdown, oil can’t fall too far below $40” because that would discourage growth in oil output from nations outside of the OPEC+ alliance.

As the world’s biggest oil buyer, what happens in China is critical. The nation’s imports slowed following a cargo-buying frenzy earlier this year. Despite the drop in imports, stockpiles in the country rose to 72.7% of capacity in the week-ended Sept. 24, according to the satellite tracking company Ursa. That’s just shy of an all time high of 73%. They have risen in 15 of the past 19 weeks, steadily climbing since May, the firm’s figures show.

While that may not look like a country in a rush to buy cargoes, there are also some very positive end-user demand figures. Traffic congestion in the ten largest Chinese cities rose last week to the highest since late January, settling at 5% above the 2019 average, according to data from satellite navigation company TomTom International BV. To be sure, gasoline isn’t as important to overall oil consumption in China as it is in the U.S.

It’s uncertain where all that will ultimately leave the nation’s crude buying, which has become a key support for prices since the pandemic hit. At the moment, a few of China’s independent oil refineries, so-called teapots, are asking for additional quotas from the government to be able to purchase extra crude. The extent to which those are granted will have a big say on future imports. For the time being, it appears there may be little change, according to Li Li, an analyst with ICIS-China.

“China’s crude imports peaked in June and imports from September will only stay flat from August level,” she said. “Refining margins also fell from a peak in the second quarter when China introduced floor pricing, going forward, we may see run cuts from both state refiners and teapots.”

Different Picture

The picture in the U.S. is different. Crude inventories have dropped by 46.3 million barrels since peaking for the year in mid-June. While that’s a much faster decline than normal for the time of year, it’s also the case that stockpiles remain at seasonal records—at a time when oil demand has clearly slumped.

Part of the drop in inventories has been a down-trend in production. Output has slumped by about 2.4 million barrels a day since peaking in February, according to data from the U.S. Energy Information Administration. To put that into context, Kuwait pumped 2.27 million barrels a day in August, according to estimates compiled by Bloomberg.

Importantly, though, there are signs of weak end-user demand. Traffic jams haven’t made a return in the Americas, pointing to weak road fuel demand, TomTom data show. U.S. gasoline consumption stood at 9.5 million barrels a day last year, according to BP Plc, far outstripping that of any other nation. China’s was 4.4 million barrels a day in 2019.

Market Signals

Perhaps the answer lies in the signals that the market itself is giving, and those perhaps lean more toward the bears’ viewpoint.

Brent futures are trading in what’s known as a contango, meaning more-immediate prices are at discounts to clear a short-term surplus. Earlier in September, that briefly revived a trade where companies put millions of barrels into tankers and forward sell the cargoes at locked-in profits.

In the North Sea, a handful of vessels have begun storing crude again amid a slump in demand from Asian buyers. About 14% of all the cargoes shipped from West Africa, North West Europe, and the Mediterranean were sent to China buyers August, down from 32% in back in April when prices were crashing, tracking data compiled by Bloomberg show.

Diesel, a barometer of industrial activity, is trading at the lowest premiums in years to crude in Europe and Asia. That’s despite the fact that traffic has rebounded strongly in capitals including London, Paris, Berlin, Warsaw, Brussels and Moscow. The French capital, for example, saw the worst traffic jams last week since late February. Even in London, where the government last week urged the return of working-from-home for office staff, traffic remains strong.

A big cause of the weakness is refineries, unable to find buyers for jet fuel because of the collapse in aviation demand, have been diverting more of the petroleum product to making diesel, adding supplies to an already saturated market. Again, the weakness encouraged traders to store the fuel at sea, a sure sign of a glut. But demand is also still well down from where it was before the virus pushed swaths of the continent into lockdowns back in March and April.

“Diesel demand is way down, and a lot of that is the economy,” said Paul Horsnell, head of commodities research at Standard Chartered. “Third quarter fundamentals were so much weaker than consensus expectations, we can’t see what has changed that would allow out-performance in the fourth quarter.”