Morning Update 03/30/2020

Overview:

Energies are lower with Brent hitting a fresh 18-year low as demand reduction fears continue. Goldman Sachs analysts seeing demand falling by 26 mmbpd this week. (WSJ/DJI)

Refinery run rates are dropping as product margins fall. This, together with ample crude supply, is forcing freight rates up as oil is seen going into floating storage. Product and crude inventories are seen swelling storage capacity, which should lead to further run cuts and further crude oil shut-ins.

Freight rates for VLCCs have doubled since last Wednesday. Monday's rates were seen at $180,000/day vs. $125,000 seen Friday for the route from the Mideast to China. Time charter rates were seen at $120,000 vs. $40,000 at the start of the month. Traders are said to still be able to make millions of dollars to store oil at sea given the steep contangoes seen in the oil curve structure. (Reuters)

The May/November Brent spread has fallen to a new low of -$13.45. The May/November WTI spread is seen at about -$12.40. This discount has widened by more than one dollar from Friday. (Reuters)

On the demand front: the top Indian refiner is seen cutting their runs by 30-40%. Two Indian refiners are declaring force majeure on Mideast crude cargoes they were set to receive. One Indian refiner is said to be seeking to sell April loading cargoes in the hope of avoiding to pay high freight rates and also because they cannot take delivery in India then seek to resell the oil, as exporting crude out of India is prohibited. (Reuters)

Mideast jet fuel demand is seen dropping by 23% in 2020 to 420 mbpd. April and May demand could fall to 245 mbpd (or lower) as per FGE Energy analysis. The jet fuel front month spread in Singapore has fallen to its lowest level in 11.5 years at -$2.80. Jet fuel margins in Europe have turned negative for the first time ever. The jet crack from Brent crude was seen last week at -54 cents—down $2.43 from prior session.

March gasoline demand in Japan is seen at the lowest rate in 30 years and is down 8% YOY. Gasoil demand there was seen down 2% in March YOY. The gasoline crack from Brent crude in Singapore was seen averaging -$5.12 last week vs. the prior week's value of -$1.59.

One good thing is that run rates are seen being cut in Japan and this will lead to less exports of finished products. Run rates in Japan were seen at their lowest level in 21 years in the week of March 15th to 21st. (Platts)

Goldman Sachs says that commuter and airline demand (16 mmbpd) may never return to these levels. They see a possible oil shortage, though, in the future as severe shut-ins of crude production will reduce any cushion when demand returns. They see a possibibility for prices to rise above their $55 forecast for 2021. (Reuters)

Equinor says that their giant Sverdrup oil field offshore in the North Sea will reach output of 470 mbpd by early May—up from previous target of 440 mbpd. Current output is 430 mbpd. The field is seen as profitable even if Brent prices slip below $20. (Platts)

In China, 98% of major industrial companies are said to have resumed operations and 90% of workers there have returned to work. Some export companies there may suffer if demand stays weak for too long. Note, they may struggle to survive as reported by the Wall Street Journal. 

The Chinese Central bank unexpectedly lowered the reverse repurchase rate by 20 basis points and injected liquidity into the banking system for the first time in 29 days. (Reuters)

Sinopec is said to have raised their refinery throughput to 72% from 64% in February, 89% seen in January and the 91.3% rate averaged in 2019. Jet fuel inventories are said to be at capacity, and thus, they are seen keeping jet-making units idle and blending kerosene into gasoil, using it for feedstock in petrochemical manufacturing. (Platts)

In Asia, Mideast crude sellers were heard to have retreated, causing the Brent/Dubai spread to weaken to a new low of -$6.05–down from -$4.61 seen Friday. (Platts)

On Friday, Western Select Canadian crude fell to a record low of $5.03, but shut-ins there may be fewer as the cost of shutting-in is expensive and cannot be reversed so quickly. This, despite the very high short run marginal cost (HSRM) for the crude there of $28 vs. Russia's cost of $10, the US’s cost of $9 and Saudi Arabia's cost of $4. (Bloomberg/NGI)

Friday, the EPA extended the period that marketers could sell winter grade gasoline from May 1st to May 20th. This in an effort to reduce winter grade supplies to make room for summer grade supplies. (Reuters)

Friday, Baker Hughes reported that the US oil rig count fell by 40 units, bringing the oil count to its lowest since March 2017. (Reuters)

CFTC data issued Friday showed that money managers raised their net length in WTI by 18,612 contracts on the CME/ICE combined. RB length was reduced by 10,189 contracts in the same week ended 3/24. ULSD positions were little changed.

Technicals:

Technically, crude oil remains on the defensive with the recent low in WTI at 1946 as support and resistance lying above at 2291-2309. Momentum is trying to stay positive, though it looks poised to turn negative.

June Brent support is seen at monthly lows from years 2002-2003 at the 2505-12 levels. Resistance lies at 2831-34.

RB May futures support at 5488 has been broken. Below that, we see support at 5354-61 and then at 5248-53. Resistance lies at 5811-23 and then 6023-34.

ULSD support for May is seen at 10090. Resistance is at 10779. Product momentums are positive.

Natural Gas:

NG is down 1.5 cents as May is now the front month. Prices are lower due to a slightly warmer forecast and the fear of reduced demand due to the virus. (NGI) Prices are lower also in synchrony with other energy assets according to WSJ reporting.

Friday Baker Hughes reported that the US NG rig count fell by 4 units.

CFTC data showed another large drop in money managers short positions held on the CME in futures/option in NG. Shorts fell by 42,677 contracts, reducing the net short position to 85,596 contracts—an amount we have not seen in a very long time. In mid-winter, short positions ran at 250,000 contracts or more. 

IHS Markit sees LNG deliveries to Europe in March hitting a record 11 mmt—adding to storage there that is well above seasonal average. It seems cargoes were resold into Europe by Asian buyers. (NGI)

Refintiv saw US NG supply Thursday at 93.3 bcf—up from 93.0 Wednesday and vs. 94.1 bcf seen the week before.

Demand was seen dropping to 98.2 bcf this week from 105.1 last week, but rising again next week to 101.9 bcf as temperatures are seen cooling somewhat then. Refinitiv is showing a forecast for the EIA NG storage number of -22 bcf for this week's data, comparing to last year's +6 bcf and the 5-year average -19 bcf. (Reuters)

Technically, NG is staying in the positive mode via its momentum with support at 1612-1613 holding. Below that, support is seen at 1597. Resistance lies above at 1680-83 and then at 1702-1710.

We believe NG is being helped overall by the large drop in the US oil rig count and the perceived fall in associated NG production. This is reflected especially in today's almost 3 cent increase in value for December vs June 2020. The market is saying that the supply drop will boost values next winter when demand picks up. The spread has gapped lower today and made a fresh low.

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