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Another Coronavirus Wave Hits Energy Markets

06/16/2020 6:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Increased cases of Covid-19 and weak economic data hitting crude oil, reports Phil Flynn.

Sunday night is always a good time for markets to overreact after a pause in global trading. A wave of crude oil and stock selling on fears of a second wave of the Coronavirus permeated the trade. The market is pricing in the odds of another lock down of global economies, thereby taking away the oil demand gains that we have seen in recent weeks.

China, ground zero for the start of the Coronavirus, accentuated those concerns. After nearly two months with no new infections, Beijing officials have reported 79 new Coronavirus cases over the past four days, according to Reuters. We also saw increases in disease in parts of the United States and Japan as well. Yet is it too early to predict a massive second wave?

It’s too early to predict another shutdown of the global economy. Oil also should focus on what seems to be a better outlook when it comes to a rebalancing of global oil supply.

We saw, for example, another increase in China’s industrial output for the second month in a row in May. Chinese refinery runs also spiked by 8.2% to an impressive 13.6 million barrels a day.

We see better compliance with the most significant OPEC Plus production cut in history, which increases the odds that the reduction will be extended until the end of the year. The cut that had reduced 10% of the global supply was in jeopardy due to some noncompliance. The biggest offender was Iraq, and both Russia and Saudi Arabia exerted pressure on the country to get their oil production under control.

Reuters is reporting that is happening. They wrote, “Iraq has agreed with major oil companies operating its giant southern oilfields to cut crude production further in June, Iraqi officials working at the fields told Reuters on Sunday. Baghdad aims to improve its compliance with its output cut targets under a global deal with OPEC and its allies to reduce the oil supply. Iraq has agreed with Russia’s Lukoil PAO (LKOH) to start an additional cut of 50,000 barrels per day (bpd) as of June 13 to lower production from the West Qurna 2 field to around 275,000 bpd. Lukoil cut output by 70,000 bpd in May in response to a request by Iraq’s oil ministry; two Iraqi oilfield managers told Reuters on Sunday. Production from West Qurna 2 was around 395,000 bpd in April, the managers said.”

The Iraqi oil managers, who oversee production operations, said state-run Basra Oil Company had asked BP (BP) to cut production from the Rumaila oilfield by around 140,000 bpd of its total production, which stands at between 1.4 million bpd to 1.45 million bpd. Exxon Mobile Corp. (XOM) has also agreed to cut an additional 70,000 bpd from the West Qurna 1 field to reduce production to around 350,000 bpd in June, the two Iraqi managers said. Production was cut by about 50,000 bpd in May and stood at approximately 420,000 bpd. Lukoil, B.P., and Exxon were not immediately available for comment. Iraq has told OPEC it would start an urgent plan to cut its oil production gradually to fully comply with its quota after the group demanded that Baghdad and other laggards adhere to a pact on output curbs.

BP is anxious about the future of oil demand. The Wall Street Journal reported that, “BP PLC is writing down up to $17.5 billion of its assets and might leave some of its oil and gas in the ground because of lower energy prices and weakened demand amid the global crisis caused by the novel Coronavirus. The British energy giant sees the pandemic—which caused nationwide shutdowns and drove U.S. oil prices into negative territory—having a lasting economic impact, leading to fragile energy demand and sinking prices. The virus will also accelerate the world’s shift to a lower-carbon economy, BP said, with governments directing some of their stimulus packages to climate-friendly initiatives. BP’s shares were down 4% in early trading Monday. The company expects to report its second-quarter results on Aug. 4, a week later than previously planned.

The largest write-down by an oil major in years is also linked to BP’s newly appointed chief executive’s plans to reshape the company. Bernard Looney, who was promoted in February, wants to prepare for a low-carbon future by making B.P. leaner and nimbler. Last week, BP said it was cutting nearly 10,000 jobs, or 14% of its workforce, as it seeks to strengthen its finances. That followed a move by Chevron Corp. to cut its workforce by up to 15%.

Gas demand is coming back and so are gasoline prices. The A.P. reported that, “The average U.S. price of regular-grade gasoline rose 11¢ over the past two weeks, to $2.16 per gallon. Industry analyst Trilby Lundberg of the Lundberg Survey says Sunday that the jump came as crude oil costs increased. The highest average price in the nation for regular-grade gas is $3.11 per gallon in Honolulu. The lowest average is $1.69 in Baton Rouge, Louisiana. The average price of diesel is $2.55, the same as two weeks ago.

Rbob futures look solid as demand is coming back. The second wave fears may pause us, but Rbob should have a great week. It should also help the oversupplied distillate market.

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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