Saudi's Self Quarantine

03/12/2020 12:24 pm EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

While fears of Coronavirus escalates, Saudi Arabia continues self-destructive energy policy, reports Phil Flynn.

In case you haven't heard, the World Health Organization (WHO) has now declared Coronavirus (COVID-19) a pandemic. Stocks and oil are taking a big hit after President Trump announced a travel ban from European nations for the next 30 days, and companies around the country are telling employees to work from home and sending them to their panic rooms. Even the CME Group announced it would close its Chicago trading floor as of the close of business Friday, March 13 as a precaution, they say, to reduce large gatherings that can contribute to the spread of Coronavirus in line with the advice of medical professionals.

The CME announcement came after the cancellation of Chicago’s two St. Patrick’s Day parades, which in Chicago is almost as bad as the Grinch stealing Christmas. The NBA suspended the season. Real March Madness has ensued as the NCAA made the unprecedented decision to hold its men’s and women’s basketball tournaments without fans in what will be one of the most surreal moments in history. Yet the closing of the rough and tumble CME Group trading floor because of this crisis may be one of the reasons market panic levels are rising to new heights. There will be an empty trading floor in a room that has always been the place that, through price discovery, would always try to strike a balance between fear and reason (though in reality the floor really no longer qualifies as a large gathering). Breaking news now that the Intercontinental Exchange is closing one of its London offices after a confirmed case of the Coronavirus.

President Trump’s speech did not have the desired effect. Instead of instilling confidence, based on the market reaction, it had the opposite effect. The talk of an EU travel ban was a blow for energy demand that is already grappling with the double assault of a Saudi Arabia versus Russia price war as well as concern for more Coronavirus drop in demand. 

This comes against a backdrop of a Saudi Arabian suicide mission to destroy the global energy market that may bring down their economy as well. Instead of relenting in its ill-advised oil price war, it appears that they are even abandoning its so-called OPEC allies. Reports that Saudi Arabia won't even participate in a conference call of the OPEC+ technical committee that was scheduled for March 18 shows that not only is Saudi Arabia done with Russia, but also with OPEC. It is possible that OPEC is dead. Long live the new world oil order. Every producer for themselves.

Bloomberg News is reporting that Saudi Aramco will supply European oil refiners in April with up to 300% of the crude they normally buy from the kingdom.

Iran just asked the International Monetary Fund for $5 billion to assist with Coronavirus efforts. Pretty sure they can just leave the money in a bag on the tarmac.

The plunge in crude oil prices is hurting U.S. energy producers and oil service companies hard. Already it is clear that the severe price decline will put in a temporary peak in U.S. oil production. The Energy Information Administration (EIA) in their one day delayed Short Term Energy Outlook, painted a picture that is expressing the growing economic pain and lower U.S. output. “EIA forecasts U.S. crude oil production will average 13.0 million barrels per day in 2020, up 0.8 million from 2019, but then fall to 12.7 million barrels per day in 2021.

The forecast decline in 2021 is in response to lower oil prices and would mark the first annual U.S. crude oil production decline since 2016. EIA models show oil prices affect production after about a six-month lag. Despite forecast annual average growth of 0.8 million barrels per day in 2020, EIA expects monthly U.S. crude oil production to begin declining around May, with production falling from 13.2 million barrels per day in May to 12.8 million in December 2020.”

The good news, if you are looking for a silver lining, is gas prices. Based on the lower crude oil price forecast, EIA expects U.S. retail prices for regular grade gasoline to average $2.14 per gallon in 2020, down from $2.60 in 2019. EIA expects retail gasoline prices to fall to a monthly average of $1.97 in April before rising to an average of $2.13 from June through August. 

Still overall the EIA is calling for a global drop in demand since the financial crisis. The EIA expects global petroleum and liquid fuels consumption will average 99.1 million barrels per day in the first quarter of 2020, a decline of 0.9 million barrels per day from the same period in 2019. EIA expects global petroleum and liquid fuels demand will rise by less than 0.4 million barrels per day in 2020 and by 1.7 million in 2021. Lower global oil demand growth for 2020 in the March STEO reflects a reduced assumption for global economic growth along with reduced expected travel globally because of the 2019 novel coronavirus disease (COVID-19).

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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