Covid-19 Relapse Concerns Weigh on Energy Market

May 11, 2020 08:18 AM
China reportedly puts Shulan on lockdown
Tighter oil supplies on the horizon
Q1 Continental Resources revenues plunged 22%
The Energy Report


The Phil Flynn Energy Report 

Breaking news from a Saudi Energy Ministry Official: The Ministry directed Saudi Aramco to reduce its crude oil production, for the upcoming month of Jun., by an extra voluntary amount of 1 million barrels per day (BPD), on top of reduction already committed by the Saudi government under the OPEC+ deal.

Locked or Loaded 

Oil prices were locked and loaded and ready to explode last week as oil demand destruction seemed to be bottoming out. Not only have we seen evidence of gasoline demand rising in the U.S. and the U.K., but also reports that China exports were rising and their inventories were falling. Yet to start this week, oil prices are pulling back on fears of a second Covid-19 wave that could be facing the world. Reports that China put Shulan, a city near the North Korean border, in lockdown this weekend, is giving pause to the oil demand green shoots of spring.

The Shulan lockdown is a concern to oil traders that were already buying oil on signs that China's oil demand was rising. Bloomberg News reported that, "In China, the trend in April was a net withdrawal driven by higher refinery runs and lucrative margins," said Yao Li, chief executive officer of consultancy SIA Energy. Estimated inventories fell by 9.5 million barrels in April after growing by 161 million in the first quarter. China imported about 9.9 BPD in April, up 1.7% from March but below last year's average of approximately 10.2 million BPD, the most in the world. Imports of crude oil and refined products are likely to rise in May, which could tighten storage capacity, China Port Association said last week in a statement.

Reports of the coronavirus comeback are hurting risk on momentum. South Korea also warned of a second wave of the coronavirus on Sunday and has delayed school reopening by a week. The reason is a rise in cases linked to the reopening of nightclubs and entertainment venues.

Meat shortage worries are rising as processing plants have been closed. Reuters reports that processors temporarily closed about 20 U.S. meat plants as the virus infected thousands of employees, prompting meatpackers and grocers to warn of shortages. Some plants have resumed limited operations as workers afraid of getting sick stay home. The disruptions mean consumers could see 30% less meat in supermarkets by the end of May, at prices 20% higher than last year, according to Will Sawyer, the lead economist at agricultural lender CoBank. While pork supplies tightened as the number of pigs slaughtered each day plunged by about 40% since mid-March, shipments of American pork to China more than quadrupled over the same period, according to U.S. Department of Agriculture data. 

Despite the setbacks, the world is going to start to reopen and for oil that means more oil demand with less production. We will see tighter supplies shortly. Anyone who filled up their gas tanks is seeing those prices rise again.

Fox Business  Network reported that, "Continental Resources Inc. swung to a first-quarter loss as oil prices crashed amid an 'unprecedented market environment' caused by the Covis-19 pandemic."

The Oklahoma City-based oil explorer founded by Harold Hamm lost $185.7 million, or 51 cents a share, as revenue plunged 22% from a year ago to $880.8 million, exceeding the $862.9 million that analysts surveyed by market-data firm Reinfitiv were anticipating. The adjusted loss of 8 cents a share missed the 3-cent loss that was expected.

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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.