WEEKLY ENERGY RECAP: Trapped between two viruses, oil market faces double trouble

People wearing a protective facemasks walk on an overpass in Lujiazui financial district in Pudong in Shanghai on February 8, 2020. The new coronavirus that emerged in a Chinese market at the end of last year has killed more than 700 people and spread around the world. (AFP)
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Updated 09 February 2020

WEEKLY ENERGY RECAP: Trapped between two viruses, oil market faces double trouble

  • The deadly coronavirus outbreak in China has hurt short-term oil market demand

Oil prices continued to fall for a fifth week in a row and reached their lowest level in a year.

Brent crude dropped to $54.47 per barrel while WTI retreated to $50.32.

The global oil market now finds itself trapped between two viruses.

The deadly coronavirus outbreak in China has hurt short-term oil market demand and at the same time cyber-attack attempts on Saudi Aramco have also increased.

One threatens supply, the other demand.  However, the downward trend in oil prices is still ultimately about macroeconomics.

Despite such headwinds, the global oil market remains largely in balance as a result of the fourth year of efforts by OPEC+ to ensure it is so — even with a surge of oil supplies from unconventional resources.

Expectations of slowing growth in the global economy in the second half of 2020 should result in slightly lower crude oil demand. 

OPEC efforts to curb production still need to be unanimously extended, especially after Chinese oil demand dropped by about 3 million barrels a day, which is about a fifth of total Chinese refining capacity. Demand could fall further as storage capacity gradually fills, causing delays in discharging cargoes and leaving refiners, already under pressure from weak margins, facing hefty demurrage charges to compensate shipowners for delays.

The situation has also discounted crude oil barrels in the spot physical market.

For instance, the spot price premiums for Russian ESPO crude oil cargoes, the only barrels that arrive in China through pipeline, as the most popular crude grade for the independent Shandong “teapot” refineries have hit their lowest in five months.

The biggest impact was felt in China’s eastern Shandong province, which accounts for almost 20 percent of total Chinese crude oil imports. Here refining utilisation rates have fallen by half.

Such shrinking demand and weakening refining capacity from China has created fallout in the shipping industry as charterers are forced to pay penalty fees to ship owners for delays in unloading cargoes. This has caused tanker rates to tumble.


European bank ramps up stimulus package

Updated 05 June 2020

European bank ramps up stimulus package

FRANKFURT: The European Central Bank approved a bigger-than-expected expansion of its stimulus package on Thursday to prop up an economy plunged by the coronavirus pandemic into its worst recession since World War II.

Just months after a first raft of crisis measures, the ECB said it would raise bond purchases by €600 billion ($674 billion) to €1.35 trillion and that purchases would run at least until end-June 2021, six months longer than first planned.

It also said it would reinvest proceeds from maturing bonds in its pandemic emergency purchase scheme at least until the end of 2022.

ECB President Christine Lagarde scotched speculation that the bank could follow the US Federal Reserve in buying sub-investment grade bonds, saying that option was not discussed by policymakers.

The announcement, which comes just weeks after Germany’s Constitutional Court ruled that the ECB had already been exceeding its mandate with a longstanding asset purchase program, prompted a rally in the euro and bond markets.

“Today’s easing measures were another illustration that the ECB means business and stands ready to do whatever is necessary to help the euro area survive the corona crisis in one piece. The ECB will do its part, and it hopes the governments will do their part,” Nordea analysts said in a note.

The bank dramatically revised downward its baseline scenario for euro zone output this year to a contraction of 8.7 percent from the modest 0.8 percent rise it had forecast only in March.

“The euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it,” Lagarde said.

She said she was confident that a “good solution” could be found on the legal stand-off with Germany’s top court.