Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 32 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.
CORONAVIRUS UPDATE: The number of new cases in China are decelerating and the government is now working to get the economy back to pre-virus levels. Factories have been ordered to reopen and non-quarantined cities should see recovery shortly. The number of cases as of Wednesday Feb 12, 2020 is 45,000 and the death toll is now over 1100. Due to the slowdown and large amount of crude inventories two of the largest refineries in China have stopped processing by 940,000b/day until demand rises sufficiently to restart refinery activity.
OPEC RESPONSE: OPEC has been having preliminary meetings with a goal of cutting back production by 600,000b/day vs. 500,000b/day in their previous discussions but Russia has still not given their ascent to supporting the cut. OPEC now believes that demand in the first half of 2020 will only see growth of 400,000b/day down from their previous forecast of 600,000b/day. To ensure that inventories do not build world wide OPEC will need to cut back at least 500,000b/day more for the first six months of 2020. The key OPEC meeting to determine the cuts should occur later this week.
EIA DATA: Commercial crude stocks in the US grew by 7.5Mb above the 3Mb estimate. The reason for this strong build was due to net imports rising by 806,000b/day on the week. This alone increased commercial stocks by 5.7Mb. US domestic production recovered the 100,000b/day loss last week and are now back to the record high of 13.0Mb. US consumption rose by 133,000b on the week to 20.97Mb/day, however motor gasoline demand fell 211,000b/day to 8.7Mb. Due to the warmer winter in 2020 total product demand is down over 4% from a year ago, also putting pressure on prices.
CONCLUSION: While the official number of cases is known there are many people who are quarantined in their homes and may not be in the official statistics. The data may also be understated in the number of deaths. With US inventories continuing to build and the probable slow recovery of economic activity in China, crude demand may not bounce back that quickly. In addition if OPEC is not successful in reducing supply at the upcoming meeting then crude prices will probably reverse the current bounce. The low so far for WTI in recent weeks has been US$49.46/b. If OPEC does not pull off the significant cuts they are talking about then it is likely this level will be breached. Energy and energy service stocks are very cheap but may likely go down a bit further in the coming weeks. We await a low risk buy signal and will inform our subscribers when this is realized.