Crude Oil Feeling Love! And, Perhaps a Bottom

02/14/2020 11:18 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Crude rebounding despite demand destruction from Coronavirus and historic warm winter, writes Phil Flynn.

Crude oil bulls are buying Valentines and buying back into oil. Shorts are running for cover as estimates of oil demand destruction are coming in lower than expected. Reuters quoted U.S. Energy Secretary Dan Brouillette: “The Coronavirus epidemic in China has had a marginal impact on energy markets and is unlikely to dramatically affect oil prices even if Chinese demand falls by 500,000 barrels per day.” This seemed to give oil a reason to start focusing on the season.

This comes as oil technically and seasonally looks like it has found a bottom. February is a time when oil tends to bottom, led by gasoline that looks ahead to the annual fuel blend switchover.

If you look at the performance of RBOB, in February, it has already exceeded the 15-year upward price move that usually occurs from February through March. It has helped that prices got crushed beyond recognition because the Coronavirus.

On top of that, Libyan oil production, due to the civil war is already seeing declines of around 1 million barrels of oil a day. That is almost double the estimates of demand destruction from the Coronavirus.

Global Warming

Besides demand was already weak and we knew it. John Kemp at Reuters reports that "Last month was the warmest January on record across the northern hemisphere, sending demand for heating oil, natural gas and coal plunging in all the major consumption centers of the world.

Land surface temperatures across the hemisphere were 2.44 degrees Celsius above the average for the same month between 1901 and 2000, the largest positive anomaly for at least 140 years.

emperatures were well above the long-term average simultaneously throughout Europe (+3.16 degrees), North America (+2.12 degrees) and Asia (+3.46 degrees), according to the U.S. National Centers for Environmental Information.

The unusually warm January followed a warm December (the second warmest on record) and a mild November (the 11th warmest on record), effectively eliminating the first half of the winter heating season. As a result, hemispheric temperatures were 1.84 degrees Celsius above the long-term seasonal average for the three months between November and January, which was also the warmest on record.

The massive and widespread warm anomaly has cut fuel consumption in all the major centers by probably the largest weather-driven amount in history. Coupled with a global economy that is still sluggish after the U.S.-China trade war and is now hit by a Coronavirus-driven downturn, the warm winter has worsened the existing oversupply of oil, gas and coal.”

Yet reports are that China is buying oil regardless. Bloomberg reports that a sudden oil buying spree by China’s independent refiners has taken Asian traders by surprise. Other cargoes are being diverted to South Korea, Malaysia, Singapore and other locales in China, while storage tanks in Shandong province - where Qingdao is located - are filling swiftly, sources said.

Oil storage tanks in China’s eastern Shandong province are nearing peaks seen last June as independent refiners slash processing rates, industry sources said.

“We are cutting runs, but we still have (crude) cargoes on the way,” said a Chinese refinery source, adding that the company was still exploring options as land storage is limited and it is costly to store on ships.

Shandong’s commercial and strategic crude oil stocks are currently at 171.5 million barrels, not far from their peak of 175 million barrels in early June last year, according to oil analytics firm Kpler.

“In theory, there is a lot of spare capacity to fill, but we have never seen this full utilization” of storage, said Kpler analyst Alexander Booth, adding that utilization rates are currently at 61% in Shandong, versus 63%.

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