Could Covid-19 Spike Reverse Oil Demand Gains?

Rise in Covid-19 cases is the biggest threat to demand
Global oil demand fell by 16.4 BPD year-on-year in Q2
Tropical Storm Fay could rain on gas demand
Energy Report

Energy Report


The Phil Flynn Energy Report 

60,000 Reasons

There are 60,000 reasons why oil prices are faltering. A grim report that showed a record  U.S. daily cases of Covid-19 infection reported. While many of those cases may be because of increased testing, the fear that this spike will reverse oil demand gains is a growing concern. Not just here in the U.S. but around the globe as well.  In fact the International Energy Agency, (IEA), while caught by surprise by the swift recovering global oil demand, warns that the rise in Covid-19 cases is the biggest threat to demand and the oil price recovery. 

Global oil demand fell by 16.4 million barrels per day (BPD)  year-on-year in Q2 as lock-downs were imposed to combat the Covid-19 pandemic. Demand rebounded strongly in China and India in May, increasing by 0.7 million BPD and 1.1 million BPD M-o-M, respectively. World oil demand is projected to decline by 7.9 million BPD in 2020 and to recover by 5.3 million BPD in 2021. The recent increase in Covid-19 cases and the introduction of partial lock-downs introduces more uncertainty to the forecast.

Crude prices increased in June for the second successive month. North Sea dated prices oscillated between $38-$43.00 per barrel of oil (bbl), supported by tighter fundamentals but capped by rising numbers of Covid-19 cases and economic uncertainty. By early July, prices were firmly above $43.00 per per bbl. The flatter contango seen recently will encourage crude stock draws. With ample stocks, product prices lagged crude, squeezing cracks and refinery margins. Freight rates continued to ease over the month.

Still while WTI crude oil has faltered at $40.00 a barrel, we’re still on a path of tightening supply. Unless we have a major rerun of a global economic shutdown, the worst should be over. Yet shutdown fears are weighing and if they continue it will mean that U.S. oil producers will have to start shutting in again. 

Gas demand had been coming back. Will it continue? Lock-downs may not have the same impact on gas demand but we will see if Tropical Storm Fay has its way and creates its own gas demand killing lock-down. Refiners on the East Coast also have to keep an eye on Tropical Storm Fay. Tropical Storm Fay is expected to come closer to making landfall Friday with rain and flooding expected along the mid-Atlantic coast and southern New England. Tropical Storm Warnings and flash flood watches remain in effect for the tri-state coastal area. The worst of the rain in the area is expected Friday afternoon into Saturday morning. The storm had grown slightly stronger early Friday as it headed northward just offshore of the Delmarva Peninsula at 8 mph with top sustained winds of 45 mph, the National Hurricane Center reported. Fay was expected to bring 2 to 4 inches of rain, with the possibility of flash flooding in parts of the mid-Atlantic and southern New England, The U.S. National Hurricane Center. That's down from earlier forecasts of about 3 to 5 inches of rain. A tropical storm warning remains in effect from Cape May, New Jersey, to Watch Hill, Rhode Island.

Dow Jones reports that Chevron Corp. said it was beginning the startup Friday of a gasoline-making fluid catalytic cracking unit after maintenance at its Pasadena, Texas, refinery. In a statement to the Texas Commission on Environmental Quality, the refinery said the startup process could last until Tuesday. The 110,000 BPD refinery is in the Houston area.

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About the Author

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