The Phil Flynn Energy Report
I guess you could party like it’s 1999 as long as you remain socially distant. The price of oil has hit the lowest levels since that iconic year as global oil demand has plunged and the world worries about running out of oil storage. Of course, as terrible as oil looks, when you look at the 1999 low for oil, it was a great long term buying opportunity. We know that low prices eventually cure low prices. The Asian financial crisis caused oil to dip into the $10 handle, yet set the stage for the Chinese industrial revolution that was built on cheap oil. Yet this time around the hit to demand is unlike anything we have experienced. But the one thing we do know is, it's taking out a big part of the U.S. shale oil industry and is cutting energy capital spending by record amounts.
While we are probably setting the stage for a significant bottom in oil, it doesn't matter for the May futures contract that will be delivered into a nightmarish bearish situation. Not only has demand ground to a standstill, the impact of oil cuts from OPEC+ also will not start in time for the current delivery. Saudi Arabia is set to sell about 600,000 barrels a day of crude to the U.S. in April, the highest volume in a year.
We could be looking at one of the worst deliveries for WTI ever as refiners are not running at high rates, and storage is getting full at the Cushing, Oklahoma delivery point. Seeking Alpha says that Cushing working storage capacity is 76 million barrels. Cushing inventory was 55 million barrels, according to EIA at the end of April 10, and as of the latest data up to April 14, according to Genscape, Cushing is at 60.66 million barrels. Yet it’s not just Cushing that is filling. Reuters is reporting that traders are storing an estimated record of 160 million barrels of oil on ships - double the level from 2 weeks ago.
Reuters also reported that China pushed crude oil into storage tanks at almost double the rate in the first quarter of this year than it did in the same period in 2019 as the new coronavirus hit domestic consumption. China's crude oil imports were 10.2 million barrels per day (BPD) in the first 3 months of the year, according to customs data. Domestic output was 3.74 million BPD, giving a total of available crude for the quarter of 13.94 million BPD. Refining, throughout the first quarter, was the equivalent of 11.96 million BPD, meaning of the total available crude of 1.98 million BPD wasn't processed by refineries.
Doing the same calculations for the first quarter of last year shows imports of 9.83 million BPD, domestic production of 3.84 million BPD, and refinery processing of 12.6 million BPD, leaving a gap of 1.07 million. The numbers suggest that China almost doubled the rate at which it put oil into storage in Q1 2020, in order to deal with the loss of consumption as the coronavirus caused much of the country to be placed in some form of lock-down. China's exports of refined fuels also rose in the first quarter of this year, reaching 18.02 million tonnes, up 9.7% from the same period last year. A breakdown by type of refined product isn't yet available, but it's likely the bulk of the increase was in gasoline and middle distillates such as jet kerosene and diesel. Overall, the picture that emerges from the first quarter is that China decided to increase crude storage flows rather than cut back on imports.
Gas prices are still plunging just as summer blends of gasoline are supposed to be produced. DTN reports, "The governors of 5 states have asked the EPA to waive Renewable Fuels Standard volume obligations citing the current Covid-19 national emergency, in a letter sent to the agency on Wednesday. Governors Greg Abbott of Texas; Gary Herbert, Utah; Oklahoma's Kevin Stitt; Mark Gordon of Wyoming; and Louisiana's John Bel Edwards, said refiners in their states face financial burden as a result of oil-market disruptions caused by economic shutdowns around the world. "Under this waiver provision for severe economic hardship, the U.S. Environmental Protection Agency must assess the condition of the refining sector as it finds it under current circumstances," the letter said.
Natural gas is finding support as plunging rig counts are lowering production expectations.
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