Talk Of Chinese Economic Stimulus Supports Energy Markets

We already have priced in massive demand destruction in oil
Talk of more Chinese economic stimulus is lending oil market support
EIA revised its February total US shale oil production forecast downward
The Energy Report

The Energy Report


The Phil Flynn Energy Report 

Oil Things Going On


Other things are going on in the oil market other than demand destruction from the coronavirus. Oil is shaking off coronavirus fears and focusing on threats to supply, and geopolitical risks as Brent crude has rallied seven days in a row. The U.S. sanctions on Russia’s largest oil producer, Rosneft PJSC, for selling oil from Venezuela’s state-run oil company PDVSA and talk of more Chinese economic stimulus is lending support, as well as the Energy Information Administration (EIA) lowering the outlook for U.S. shale oil production. But what may be the most crucial bullish factor is the continuing loss of Libya’s oil supply.


The oil market is starting to realize that as bad as the demand destruction is from the coronavirus, the lack of exports from Libya might be meeting the oil demand destruction barrel for barrel. Libya was exporting 1.2 million barrels a day. That is more than the demand destruction estimates of about 400,000 barrels a day to about 1 million a day. Whatever the real demand destruction is, it's clear that Libya is offsetting a lot of that and after year, the odds of Libya oil exports coming online have gone down dramatically.


Ceasefire talks in the Libyan civil war broke down after Egypt Today reported that the Libyan National Army (LNA) led by Khalifa Haftar on Tuesday announced they destroyed a Turkish ship in the Port of Tripoli, in the capital, which it said was carrying weapons and ammunition. "A Turkish ship loaded with weapons and ammunition, which docked this morning in the port of Tripoli, was destroyed," said the media center of the LNA's Dignity Operations Room on Facebook. Chief of Staff of the Libyan naval forces Major General Faraj al Mahdawi in December said the navy is on high alert to confront any possible attack by Turkish authorities on Libya. In statements to Al Arabiya news channel, he said the navy is well prepared to repel any Turkish violation of the Libyan coast. The army is also ready for action and will block any backup for the militias and prevent access of Turkish forces into the Libyan lands, he said.


Bloomberg reported that “The U.S. sanctioned a unit of Russia’s Rosneft PJSC for maintaining ties with Venezuela’s Nicolas Maduro and its state-run oil company. The restrictions come with a three-month wind-down period that expires May 20.“ These sanctions will be supportive for prices,” said Phil Flynn, senior market analyst at Price Futures Group. “Ultimately, Russia does not want to be on the wrong side of the energy trade.” The sanctions on Rosneft represent the latest effort by the U.S. government to increase pressure on Nicolas Maduro’s regime. Rosneft called the sanctions illegal and ungrounded. The tensions also come at a time when oil markets are awaiting a response from OPEC+ on production cuts. Russia, one of the largest exporters in the coalition, has been reluctant to curb oil output past the current production cuts.”


While there are reports that China refinery runs have dropped sharply, maybe as much as 3 million barrels a day, they continue to juice up the economy. Bloomberg reported China is considering measures such as direct cash infusions and mergers to bail out an airline industry crippled by the coronavirus outbreak, according to people familiar with the matter.


U.S. shale production is faltering. S&P Global Platts reports that "The EIA revised its February total US shale oil production forecast downward from last month's prediction. In January, EIA predicted shale oil would swell to a record 9.2 million b/d in February, but now it forecasts production for the month of 9.157 million b/d. EIA analyst Jozef Lieskovsky said the impact from the China coronavirus has not yet figured into DPR forecasts, although the agency is monitoring the situation.” As for slower growth prediction for March, data that emerged Friday from North Dakota's monthly production webcast, was "disappointing," Lieskovsky said, noting the Anadarko Basin has lost rigs and completed fewer wells, which figured into the agency's March estimates. But last week, the Anadarko Basin added a few platforms, and "declines may stabilize in a few months," Lieskovsky added. Also, going forward, some news out of the Eagle Ford Shale has been "positive" for potential oil growth, he said, and completions in the Bakken Shale could rebound during summer months and "bring [a bit of] new growth back" to the basin.


U.S. shale oil production is set to increase only 11,000 b/d in February and 18,000 b/d in March, low growth levels not seen in over three years, the U.S. Energy Information Administration said Tuesday, with only the Permian Basin increasing output in the months. Last month, EIA pegged February output growth at 22,000 b/d in its initial estimate before halving that figure in its revised forecast 30 days later in its Drilling Productivity Report. The last time the agency's forward growth forecast for shale oil was lower was January 2017, when the growth rate was pegged at 2,000 b/d, and total shale oil output was supposed to reach 4.542 million b/d. The EIA sees total U.S. oil production at 9.156 million b/d in February and 9.174 million b/d in March. The Permian in West Texas/New Mexico is pegged to grow in February by 42,000 b/d on a month to 4.816 million b/d and increase by 39,000 b/d in March to 4.855 million b/d.


On top of that, “Saudi Arabia's crude stockpiles fell by 11.8 million barrels in December, despite steady shipments by the world's biggest oil exporter, official data showed on Tuesday. The kingdom's oil inventories declined to 155.199 million barrels in December, from 167.013 million barrels in November, according to data on the website of the Riyadh-based Joint Organisations Data Initiative (JODI).


 RBOB gasoline is keeping up with a seasonal upswing. Refinery issues are underpinning it.

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About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.