The Phil Flynn Energy Report
Getting it Together
The oil price was surging on reports that the coronavirus might not be as deadly as feared, and a vaccine may be on the way, as well as China lifting some quarantines. China is calling on all regions outside of the Hubei province to resume their "normal" work starting from next week onwards. Yet oil is giving up some overnight gains on news that OPEC plus, mainly Russia, can’t finalize a 600.000 barrel a day oil production cut.
Late yesterday, oil prices seemed unfazed that the joint technical meeting between OPEC and Russia ended without an agreement because of an unprecedented extension of the two-day meeting into three days. The extra day in Vienna gave the trade hope that a deal was done. Reports coming out of the third-day meeting seem to suggest that the group is no closer to an agreement to cut production response to the demand destruction created by the coronavirus. The hold up appears to be Russia who can't decide whether or not it wants the group to hold an “emergency meeting”. I thought an unprecedented extension of the 2-day OPEC+ Joint Technical Committee was an emergency meeting. Reports say that Russia needs more to assess its OPEC plus position.
The OPEC plus drama and coronavirus trading seemed to overshadow the Energy Information Administration (EIA) report that the market took as a bullish report. While the headline oil number came in higher than expected, a drop in U.S. oil production and draws in both gasoline and distillate, changed the perspective on the report. The fall from a record high in U.S. oil output may be the first sign that U.S. shale oil might be peaking. Substantial cuts in rig-counts and investment may be taking its toll. Of course, we cannot read too much into one week's decline but expectation by many in the industry is that we are near peak output.
The EIA snapshot - U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.4 million barrels from the previous week. At 435.0 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year. Total motor gasoline inventories decreased by 0.1 million barrels last week and are about 4% above the five-year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories fell by 1.5 million barrels last week and are about 4% below the five-year average for this time of year. Propane/propylene inventories increased by 0.6 million barrels last week and are about 37% above the five-year average for this time of year. Total commercial petroleum inventories decreased last week by 0.9 million barrels. Total products supplied over the previous four-week period averaged 20.3 million barrels per day.
Yet could the demand fall-out from the coronavirus be not as bad as feared? Reuters is reporting, "Fatalities from the coronavirus epidemic are overwhelmingly concentrated in central China’s Wuhan city, which accounts for over 73% of deaths despite having only one-third the number of confirmed infections. In fact, as of Tuesday, 24,551 cases have been confirmed globally. A 1% fatality rate would put total cases at over 49,000, based on the current death toll of 492.
In other news, Reuters is reporting China on Thursday said it would have additional tariffs levied against 1,717 U.S. goods last year, following the signing of a Phase 1 deal that brought a truce to a bruising trade war between the world’s two largest economies. Winning!
Natural gas tried to rally on cold forecasts but failed. Andrew Weissman of EBW Analytics writes that weather-driven demand for natural gas has fallen for nine consecutive weeks, erasing a cumulative 349 gHDDs and 573 Bcf of gas. Currently, the potential for late-February cold, rising spot market demand, and supportive technicals point to a brief move higher for NYMEX futures. The year-over-year storage surplus could surge 250 Bcf by mid-March, production may bounce seasonally, and the specter of weak international gas pricing is likely to result in downward pressure on natural gas. Early in the earnings season, gas-focused producers are suggesting flat year-over-year output in lieu of declines, reducing potential upside. Further, a vastly oversupplied international market may shut-in US LNG—likely limiting late-summer upside price potential for natural gas.
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