Rumors persisted about Iran, Russia or OPEC close to declaring productions cuts, so that has to factor at least into sentiment about oil trading. However, with rumors being denied, the physical universe of crude oil especially in the US has been fundamentally more negative again. Yet, oil prices have reached back to almost $34 (front month futures) again today just a day after the US EIA reported a record high in crude inventory.

For answers to what may seem contradictory we need only look to the Far East (west from the US, that is). In order to view the full landscape including oil, you have to start at the end of last year. Not only was it likely that autonomous liquidity factors for China’s monetary system would reverse the alleviation of December, but the PBOC itself ended the year unusually optimistic given all circumstances.

On December 30, the PBOC announced it would completely forgo reverse repo operations for the first time in six months – going back to before all this open unpleasantness. If the trick was designed to instill confidence, it worked:

“Compared with previous years, interbank liquidity isn’t tightening much this time,” said Wan Zhao, a Shanghai-based analyst at China Merchants Bank Co. “We also don’t rule out the possibility of a reserve-requirement-ratio cut. If the central bank is preparing that, then reverse repos aren’t necessary.”

The problem with confidence is that it isn’t worth anything tangible; liquidity being what it is, confidence can only be helpful where there is reasonable expectation for completion in the most positive sense. Nobody watching China, let alone in China, could have possibly had that impression except those closest to the central bank (above) – particularly when all the PBOC had (has) left are the same means as had utterly failed consistently so far.

Reverse repos, as it turns out, were almost immediately deemed “necessary” and in gigantic amounts: