The petroleum complex continues to be shaken by the uncertainty posed by the coronavirus on economic growth. The declaration by the World Health Organization that the virus now constitutes a public health emergency of international concern stoked fears that the impact on travel and consumer spending will likely get worse before it gets better. The concerns are leading to steady downward revisions in forecasted growth of the Chinese as well as US economies. Goldman Sachs indicated that the outbreak would shave as much as .4 percentage points off Chinese growth in 2020 and could drag down the US as well. Oil demand might be reduced by as much as 250 tb/d in the first quarter from current forecasts due to the outbreak.
The demand concerns and the associated weakness to oil prices are being taken seriously by OPEC and in particular Saudi Arabia. Reports suggest that they are considering proposing to move up the March OPEC meeting to early February in response to the recent events. Whether other members are willing to partake in further cuts remains to be seen. The pace of demand recovery following the trade agreement between the US and China has likely been set back due to the coronavirus. The fear over growth in China and associated areas such as India, who are primary drivers of global oil demand will be a key consideration for the market particularly as oil production from non-OPEC sources expands in 2020.
The potential that Chinese economic growth could fall to near a 5% annual rate in the first quarter will undoubtedly undercut rally attempts. Until we get a better feel of how demand shakes out, we suspect the large long speculative position will precipitate good selling as doubts over how much OPEC+ can cut supplies remain in the background.
The market steadied today on light volume following two consecutive sessions where a new low was established. Yesterday’s weekly storage number indicated a somewhat surprising draw of 201 bcf compared to estimates around 194, but prices reacted negatively after the report and are still trading below pre-release levels after today’s recovery. Demand continues to be the problem as it seems that every forecast revision lowers heating degree expectations as we run out of winter potential. We still hold out hope that the 1.80 level will hold the line as underlying support from gas/coal switching, improving LNG flows, and easing production begins to take hold. Early guesses for next week point to a 122 bcf drawdown in stocks compared to the 5 year average at 143.
Charts Courtesy of DTN Prophet X
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options ADMIS position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to. The authors of this piece currently maintain positions in the commodities mentioned within this report. Charts Courtesy of DTN Prophet X, EIA.
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