Oil Traders Noodle Over Virus, Geopolitical Risks and Supply and Demand

Oil pullback on coronavirus news
Primary catalyst for oil selloff was a report from the WHO that deaths from the virus have only just begun
Drone Attack on Saudi Aramco can't spark oil rally
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The Phil Flynn Energy Report 

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The global market once again is being held back by coronavirus developments with reports that the virus will start to wreak havoc outside of China. Even a strong reading from the Philly Fed and a bullish Energy Information Administration (EIA) report were not enough to ease renewed fears of the virus. The Philadelphia Fed in February hit a reading of 36.7, the highest reading in three years and well above expectations. The EIA also reported a big jump in refinery runs and a much smaller than expected 400,000 barrel increase in crude supply, leaving crude supply still 2% below the average range for this time of year.  So oil, because of this, still closed higher but well off its earlier highs because of fear.


The primary catalyst for that fear was a report from the World Health Organization that suggested that deaths from the virus have only just begun and we will see many deaths outside of China. The oil market sold off on those headlines, yet reports out of South Korea sounded more alarm bells overnight. The BBC reported that the southern cities of Daegu and Cheongdo had been declared "special care zones." The streets of Daegu are now largely abandoned. All military bases are in lockdown after three soldiers tested positive. About 9,000 members of a religious group were told to self-quarantine after the sect was identified as a coronavirus hotbed. 


Yet despite the panic, oil traders are still optimistic that oil demand is going to come back strong. John Kemp of Reuters reports that, “Oil traders anticipate oil supplies will be fairly tight this year, notwithstanding short-term impact on consumption from coronavirus. Brent crude's six-month calendar spread has reverted to a backwardation of $1.45 per barrel, which is in the 66th percentile for the last 30 years.”


We also believe that there will be life ahead, yet the unknown keeps us on edge. The EIA reported that, "Total motor gasoline inventories decreased by 2.0 million barrels last week and are about 3% above the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 0.6 million barrels last week and are about 4% below the five year average for this time of year.


Natural gas saw a bullish 151 withdrawal from supply but could not hold the post report pop. The fact that U.S. production hovers near record highs and the fact that winter is almost over, is making it the bull's last shot.


LNG looks like a bargain, at least to India, right now. Reuters is reporting that, “India is set to import record volumes of liquefied natural gas (LNG) this month, data shows, taking advantage of the super-chilled fuel’s price hitting all-time lows due to the coronavirus outbreak dampening demand in China. “The South Asian nation is estimated to import about 2.36 million tonnes in February, ship-tracking data from Refinitiv Eikon showed. That would exceed India’s LNG imports in October of about 2.3 million tonnes, the previous highest monthly total. The country’s annual LNG imports are expected to rise by 10%-15% this year, said Poorna Rajendran of consultancy firm FGE. “The low spot prices are creating some downstream demand, especially from the city-gas sector,” a source familiar with LNG imports into India told Reuters. India re-gasifies LNG and uses it primarily in the city-gas distribution, fertilizer, power and industrial sectors. Asian spot LNG prices LNG-AS fell to a record low this month after China’s top LNG buyer declared force majeure on some LNG deliveries following the coronavirus outbreak. That prompted some of the cargoes bound for China to be diverted to India and also some Indian buyers to issue tenders seeking spot cargoes, traders said. Some of them are even seeking cargoes for several months, they added.

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About the Author

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