Energy Brief February 10

by Archer Financial Services | Feb 10, 2020
by Steve Platt and Mike McElroy

Price Overview

The petroleum complex traded under pressure as fears over demand prospects in China and globally garnered attention.  Concerns over the weekend that the virus had spread more than reported was keeping pressure on a range of commodities including crude oil and nat gas, key imports of China. The selling continued to be exacerbated by reports that Petro China plans to reduce its planned crude throughput by 320 tb/d due to weaker fuel demand. Greater cutbacks were expected to 377 tb/d in March. The cuts which represent 10 percent of their crude runs follows on the heels of Sinopec’s reduction in runs reported last week that they were reducing runs by 12 percent. Independent refiners have reportedly cut runs to half their runs. Although support is strong within OPEC for additional cuts the lack of movement by producers following Russia’s comments last week that they needed more time to assess the situation continues to be a source of disappointment as doubts arise on how quickly the developing surplus will be sopped up if at all. 
The Global situation remains the central focus. Reports that crude flows to Europe are set to increase as shipments are diverted to Europe from China might lead to some backup at the US Gulf leading to increases in inventories. On a global basis, expectations of a decline in consumption of as much as 1 mb/d in the first quarter to 98.8 mb/d are circulating helping keep the market on edge. 
The crude market will likely be gauging OPEC’s position closely. The appearance that OPEC is delaying a decision to cut output to address the current imbalances in the market suggests that key members are reaching limits with respect to their level of cooperation and may well just begin believe that the best course of action might be to let prices fall to shut off production. The failure to respond to the cut in Libyan exports along with other special situations such as Iran and Venezuela suggests deeper problems exist. Talk that refinery maintenance might be accelerated in Saudi Arabia could allow output levels to be reduced in line with the recommendation of the Technical Committee but the ability of Saudi Arabia to absorb additional cuts and support the market in future quarters will certainly be raised by market participants. Concerns over lost market share by the Saudis will remain in the background given the combined impact of an increasing budget deficit and weak oil price. The DOE report on Wednesday is expected to show a further build in crude stocks of 2.9 mb with distillate expected -.6 and gasoline +.7 while refinery runs are expected -.3 percent. Given today’s break through the 50.00 area basis the next area of support will likely be toward the 46.50 area basis March.  


Natural Gas

Prices traded under pressure falling to the lowest level in over four years. The weakness was linked to forecasts for more moderate temperatures and weaker demand from China due to the Coronavirus.  Reports that CNOOC had declared a force majeure on LNG shipments into the country due to the virus and weaker economic activity continues to raise questions over the potential demand from the world’s second largest consumer. The uncertainty continues to undercut the market at a time when supplies remain generally high. So far it looks like shipments have not been affected with LNG exports for last week at 9.3 bcf. Nevertheless the uncertainty along with fears it will impact global petrochemical demand continues to weigh on values. Expectation for this week’s EIA report is for a draw of 103 bcf compared to the five year average of 131 and last year’s draw of 101. At this juncture better support to March Nat Gas might emerge near 1.75 reflecting a more accelerated switching from coal to Nat Gas which should begin to provide support at current price levels.  

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.