Slowly but surely, what we have claimed for the past year - that it is the demand side of the oil equation, not the supply, and especially the "Chinese wildcard" that is the critical factor in setting prices - is starting to emerge and be factored in by markets. And so, just days after we posted "Another Red Flag For Oil? China’s Crude Imports Slump To 7-Month Low" arguably catalyzed by the increasingly full Chinese Strategic Petroleum Reserve, overnight we got another major red flag - once again out of China - when Bloomberg reported that China’s oil refining dropped the most in three years for the month of July, while crude output retreated from the highest this year, "as the world’s largest consumer showed signs of losing momentum."

According to Bloomberg calculations based on NBS data released on Monday, as shown in the chart below oil processing in July dropped 4.4 percent from the previous month to about 10.76 million barrels a day. While daily refining output typically falls from June to July on maintenance, last month’s fall was the biggest seasonal decline since 2014. Crude oil output fell 3% to 3.84 million barrels a day.

Separate data from industry consultant SCI99 revealed that state refineries in northwest and southern China at the end of July cut runs to 66.9% and 64.68% of capacity, respectively, the lowest since 2014, while independent refiners, known as teapots, were operating at around 58.78% near the lowest since May 5.

The news has pressured oil prices lower all morning despite a generally risk on tone across global equities.

“We’ve been drifting lower in the morning and now are reclaiming some of those losses,” says Ole Hansen, head of commodity strategy at Saxo Bank. “There’s not a lot to get your teeth into today” Hansen said adding that “Libya could have had a bit more a positive impact on a day where we hadn’t had the Chinese product demand news”

The sharp slowdown in Chinese refining comes amid news that the pace of China’s economic expansion slowed last month, as broader data Monday showed factory output and investment moderated amid the government’s push to cool the property sector and reduce leverage. Official figures last week showed crude imports also fell in July, slipping to the lowest in six months, while net product exports jumped 19 percent.

“A weaker macro economy has to some extent also affected fuel demand,” Li Li, an analyst with Shanghai-based commodities researcher ICIS-China told Bloomberg. “Runs are low because teapots have done some additional maintenance as they run down stocks and they also lowered runs amid stringent environmental checks.”

As Bloomberg reported last month, the world’s largest refiner, state-run China Petroleum & Chemical Copr. known as Sinopec, will process about 1 million metric tons a month (about 240,000 barrels a day) less than it previously planned over June to August because of weaker fuel demand growth and competition from teapots.

Suggesting that the weakness is broad based, and not simply a one-time event, Bloomberg also notes that China is on pace to produce the least amount of crude since 2009, even as its three biggest oil companies aim to raise combined spending for the first time in four years after the country’s crude production fell at a record pace in 2016. That contrasts with a surge in natural gas production, which is being encouraged by the President Xi Jinping’s government as an alternative to coal. Crude output from January to July averaged about 3.9 million barrels a day, down about 173,000 barrels a day, according to Bloomberg calculations. The International Energy Agency forecasts full-year output may drop by 150,000 barrels a day.

Some additional details revealed in the latest set of data:

• Total crude production in July was down 2.9 percent from the same month last year at 16.25 million metric tons.
• Production in the first seven months of the year totaled 112.79 million tons, down 4.8 percent from same period last year.
• Natural gas output in July rose 14.7 percent year-on-year to 11.7 billion cubic meters.
• Natural gas output in the first seven months is up 8.8 percent to 85.8 billion cubic meters.
• Oil refining in July totaled 45.5 million tons, a 0.4 percent year-on-year rise.
• Refining in the first seven months is up 2.9 percent at 320.71 million tons.

Finally, slamming the longer-term outlook for oil was none other than the world's (formerly) biggest oil bull, Andy Hall - who as reported last week is shutting down his flagship commodities fund - saying in his August 1 letter that oil market fundamentals for 2018 "have deteriorated", and adding that OPEC’s talk of extending oil production cuts is a “sign of weakness, not of strength”, while noting that U.S. shale firms can “profitably hedge” extra 2018 output at current prices.