The petroleum complex saw some steadying in prices today, althoug volatility remained high as the oil price war and sharp demand contraction linked to the COVID 19 pandemic kept pressure on values and limited rally attempts. Concern is emerging that storage tanks will build to capacity by May in Cushing, one of the key storage hubs in the world. Possible production increases by Saudi Arabia and Russia that are expected to hit in May continue to weigh on sentiment along with fear that global oil demand could fall by as much as 10 to 12 million barrels per day in April, or about 10% of daily demand. Undoubtedly pressure is building on all producers to work to stabilize values but how that proceeds and the effectiveness of any support remains to be seen.
The burdensome supply situation along with the weakness to various demand sectors has had a pronounced impact on the spreads both intra-market and inter-market. In crude, the movement to contango has been sharp with June moving to over a 6.00 discount from a 3.00 premium. The spread looks to have reached an intermediate low given today’s decline and the uncertainty over how quickly production will adjust and demand begins to recover. While politics will likely play a role along with the economic reality of expanding budget deficits in producing countries, these considerations seem secondary for some producers behind assuring market share in what looks to be a highly demand constrained market. The low prices will have an impact on capital investment in the petroleum sector with some suggesting it will fall as much as 30 percent in the current year. A more optimistic demand scenario needs to evolve before a meaningful rally can take place.
The market found some underlying support today but not before probing to new lows overnight, with the active May trading down to 1.587 and settling near unchanged levels at 1.673. Weather forecasts revised demand downward over the next 2 weeks, but the lack of weather demand has been a reality the entire winter. The best fundamental support is emanating from good LNG demand, as today's 9.4 bcf flow was the third consecutive day at that level, compared to an average of 8.1 last week, along with solid coal to gas switching expected at these record low levels. Trade continues to await solid signs of slowing production as rig counts decrease. Thursday's storage number is expected to be an unimpressive 22 bcf draw in comparison to the 5 year average of 40. Today's low will likely get tested over the next few sessions as the market continues to digest the fallout from the coronavirus spread.
Charts Courtesy of DTN Prophet X
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