Has Crude Oil Hit a Bottom?

01/24/2020 1:00 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

While the threat to Chinese oil demand due to Coronavirus has pushed crude lower, other fundamentals are positive notes Phil Flynn.

Crude oil prices are at ground zero for the market-related fallout from the SARS-like coronavirus, a virus called 2019-nCoV. While the stock market is already looking past the disease after the World Health Organization (WHO) said it was too early to declare an international emergency, oil demand is suffering. Sure, oil did pop off of the lows after the WHO declaration and may have even hit bottom, yet some damage has been done.

Already the virus has caused significant oil demand destruction to take place. China’s quarantine is growing, locking down over 40 million people. Many of those 40 million would typically be traveling by planes, trains, busses to vacation spots and partake in Lunar Day festivities. Even those that are not under quarantine may stay home at a time when hundreds of millions travel in China in and out of the country. Many of the Lunar Day festivities have been canceled along with flights due to airport closures and trains shutting down that will eventually add up to hundreds of thousands of unused barrels of jet fuel, diesel and gasoline.

The key, of course, for oil is to determine how quickly the quarantines will be lifted and whether this virus is really under control or if it continues to spread. Yesterday the WHO press conference became a market-moving event as stock traders rejoiced when they said this was just a China problem. Yet the disease has crossed borders and has been found in the United States, Japan, Singapore, Thailand and Vietnam.

The New York Times reports that, “Researchers at Northeastern University and Imperial College London estimate that the number of cases may be five or 10 times higher than what has been reported. The most likely number is around 4,000 cases, according to the estimates, which will change as more information about the virus becomes known. That is much more than the 800 confirmed cases that we have heard about.

The virus overshadowed what would have normally had been a very supportive Energy Information Administration (EIA) supply report. Market Watch reported that U.S. crude supplies fell by 400,000 barrels for the week ended Jan. 17. Analysts polled by S&P Global Platts forecast a rise of 500,000 barrels, while the American Petroleum Institute on Wednesday reported an increase of 1.6 million barrels, according to sources. EIA and API data were each released a day later than usual because of Monday's Martin Luther King Jr. holiday. The EIA data also showed a supply climb of 1.7 million barrels for gasoline, but distillate stocks declined by 1.2 million barrels. The S&P Global Platts survey had shown expectations for an increase in supplies of 3.3 million barrels for gasoline and 1.6 million barrels for distillates.

U.S. production held at 13 million barrels a day and demand came back. Total commercial stocks fell 1.9 million barrels. Total demand on the U.S. system increased 2.95 million barrels-per-day to 30.29 million. Just short of the all-time high for total U.S. demand is 30.54 million barrels-per-day The United States was a marginal net oil importer.

Despite the pall hanging over the Lunar New Year, I want to wish those who are celebrating a very happy and safe one. By the way, it is the "year of the rat,” and according to my Chinese restaurant menu, I was born a rat. Hey wait a minute! Insert joke here.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn
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