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Don’t Worry Oil, China Will Save You

oil demand

By: Kenneth Rapoza – Forbes – Sorry, Greta. Sorry, Extinction Rebellion. We haven’t seen the end of the oil industry yet.

The dramatic slide in U.S. oil futures on Monday is over. Oil bears loved it. Oil haters celebrated “big oil’s” demise on Twitter (then deleted their tweets). The slide into negative pricing probably won’t happen again. Of course, there is never any certainty to that, but the coming end to lockdowns in the U.S. and Europe, coupled with China demand for oil, is building a hardwood floor under oil prices.

Alexander Burgansky, head of oil & gas research for Renaissance Capital in London shared a chart with the investment firm’s followers and clients on Wednesday. It was a screen grab from a slide presentation by oil and gas business intel firm Argus, showing independent refineries in China coming back on line as quarantine restrictions ease. They are in a V-shape recovery.

The China National Petroleum Corporation expects Chinese diesel demand to already start rebounding this month as commercial truck traffic picks up. Gasoline demand in seen rising in May as more people come out of hiding from the coronavirus, and jet fuel demand is seen staging a comeback at some point in June.

“If Europe and the U.S. were to follow the same pattern, refining runs and oil demand should start to recover in May,” Burgansky says.

A Screen grab shared by Renaissance Capital on April 22 shows China demand for oil ramping up.

Oil Is Pandemic Dependent

Like the oil haters out there, some bearish investors and financial media pundits were also somewhat giddish over the prospect of watching oil go negative. Many traders are still thinking that the June WTI contract can fall under $10 easily. And maybe go to zero if headlines about the pandemic worsen.

Options prices are implying a 40% to 50% chance the June WTI futures contract falls to zero.

Given the current trends in hospitalization rates, the main epicenters of the outbreak in the U.S. are plateauing. Coronavirus infection rate deceleration is next.

Barclays thinks oil demand in the U.S. will likely hit its trough this month, with a significant amount of oil production likely be forced to shut-in due to depressed prices.

A shut-in is an industry term meaning that one or more valves sucking oil out of the ground is closed. A shut-in well means the entire well is inactive.

Shutting in production from existing wells is difficult, given the cost implications from existing leasehold and midstream contracts, in addition to a potential deterioration in well performance. But with prices below the cost of production for all shale producers here, especially smaller, private operators that control almost 40% of the combined Texas, North Dakota and New Mexico production, according to data from Evenrus, shut-ins and production cuts are a guarantee.

Some of the large, listed operators, such as Continental Resources CLR and ConocoPhillips COP have announced production shut-ins recently.

A dock worker inspects the unloading of crude oil at the Quindao port in China on March 26, 2020.

Brent crude is also having a tough time.

It fell to a 21-year low on Wednesday. The spread between the WTI and Brent has started to narrow.

“The chances of Brent falling to zero, or below zero, are minimum,” thinks Naeem Aslam, chief market strategist with AvaTrade in London. He thinks oil markets are close to bottoming out.

“The world is still very much dependent on oil, and once we are through the pandemic, demand will pick up,” he says, adding that the slide in prices will put more pressure on Russia and OPEC to cut production more than they agreed to just two weeks ago.

 

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