Is Oil Market Moving On From Coronavirus?

February 5, 2020 09:38 AM
The Energy Report

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The Phil Flynn Energy Report 

Technical Meeting Bottom

The OPEC technical meeting disappointed oil traders because OPEC and Russia failed to announce a real number on its expected production cut. Yet that may not be as important to the oil market today as the hopes that are rising that a cure for the coronavirus might right around the corner. Those hopes have oil traders tuning out a bearish headline number on the American Petroleum Institute(API) report and instead of focusing on a point when demand destruction will end and demand growth will return.

 

Sky News reported that, “The scientist leading the UK's research into a coronavirus vaccine says his team has made a significant breakthrough by reducing a part of the average development time from "two to three years to just 14 days". Professor Robin Shattock, head of mucosal infection and immunity at Imperial College London, said he is now at the stage to start testing the vaccine on animals as early as next week with human studies in the summer if enough funding is secured.”

 

This report set stocks soaring because the hopes for a quick cure and the juice from billions in Chinese economic stimulus may set the stage for an economic surge. Overnight China is saying that it will issue more tax and fiscal measures to aid the fight against coronavirus economic impact. For oil, you can add to that an expected cut in production. We could see that announced as early as today. Yet a report from a World Health Organization said: There is no known effective therapeutics against this coronavirus. That may ease us off.

 

Yesterday oil fell in disappointment that maybe OPEC could not muster the size of the cut that would be needed. Estimates of oil demand destruction were all over the board and some in OPEC were arguing for a smaller reduction and others a cut exceeding 1 million barrels of oil per day. Russia, as usual, is playing hard to get, saying it was unsure that a reduction was needed. What part of demand destruction do they not understand? No decision was made but today we may get a number. There might be a temptation by Opec to cut less now that oil is finding its footing. Yet that might be a mistake. If I were OPEC, I would instead make a more significant cut than needed. It would be a lot easier to add barrels later. Much better than having to cut again.

 

The API only added to the confusion. They reported that crude supply increased by 4.182 million barrels. Cushing supply was up 957,000. Gasoline supply was up 1.963 million barrels. Yet diesel a big-time draw of 1.783. The oil market initially sold off after the headline build but the draw on distillate is adding support. Research team HFI points out that, "Reminder last week that API was 7.85 million barrels more bullish than what EIA reported. The running error rate between the API and the Energy Information Administration (EIA)is now back above the median error line." So they project that the EIA is going to report a build lower than API (or even a small draw).

 

Reuters reports that Jet fuel demand in China was down. Between Jan. 24 and Jan. 31, aviation fuel sales in the world’s second-largest consumer fell nearly 25% from a year earlier to 555,000 tonnes, the Beijing-based source with direct knowledge of the matter said. The number of flights seeking refueling dropped by a similar margin to 84,000 during the same week.

 

Jet fuel sales - for domestic and international flights - were 3.07 million tonnes in January, 0.2% lower than the same month last year, said the source, who declined to be named because he’s not authorized to speak to the media. A spokesman for China National Aviation Fuel Company, the country’s near-monopoly jet fuel distributor, said he was not in a position to comment immediately. The source said the drop in demand will be much bigger in February because of steeper cuts in flights, likely bringing first-quarter jet fuel consumption down by half compared to the same period a year earlier.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.