Was it Too Soon for Oil Prices to Reject a Move Below $50?
Oil markets have had to digest several market-moving factors over the last few weeks, including:
Loss of Global demand, specifically in Asia (total production scale backs by state refiners Sinopec Corp and China National Offshore Oil Company estimated to be around 940,000 bpd for this month).
A cut in the IEA demand growth forecast for the full-year in 2020 by 365,000 bpd to just 825,000 bpd (which would be the lowest annual increase since 2011, and slightly below the growth figures for 2019).
Possible production cuts (an emergency meeting of OPEC+ technical experts over February 4-6 recommended a deepening of collective output cuts to 2.7 million barrels per day in the second quarter from the cut of 2.1 million barrels per day agreed for January-March.)
Potential monetary and fiscal stimulus (Beijing is expected to unleash substantial monetary and fiscal stimulus measures to attain its economic expansion goal for 2020 if the first two quarters disappoint).
Front and center to all of this remains getting a grip on Chinese demand. Wuhan is located along a key waterway that originates along the coast and allows for deliveries of crude oil to refineries in the area. For perspective, below is a map of Chinese pipeline infrastructure, refineries and storage facilities:
One of the obvious markets in focus as news of the direct flight cancellations to and from mainland China due to the coronavirus was jet fuel. This makes sense as demand growth for aviation fuel in recent years has been heavily concentrated in China, Southeast Asia and South Asia. According to the IEA, Chinese jet/kerosene demand in the first three quarters of 2019 averaged 0.858 million b/d. For perspective, the IEA reports that global jet fuel demand averaged 8.01 million b/d during the same period. Against the backdrop of total global oil demand of roughly 101 million b/d in 2019, global jet fuel demand makes up less than 10% of that figure.
With an eye towards projected growth in Chinese aviation fuel demand (among other things), jet fuel futures prices slightly outpaced the rally in WTI prices for most of 2018 before following all markets lower at the end of 2018.
Price recoveries since then have been met with selling pressure despite several supply-side scares in 2019. Once details of the coronavirus began to crystallize at the start of 2020, demand-side fears led to selloffs across the oil complex with jet futures taking a large hit (blue & pink lines above). However, drilling down a bit more we notice that both prompt jet and WTI futures began to show signs of either selling exhaustion or bottom-picking over the last week or so.
We would expect any price support in oil prices to be led by product prices. This was not the case in distillate markets. There has been a uniform decline in each of the 10 monthly ULSD/WTI crack spreads since the start of 2020. As noted by the thick black line in the next chart, the uptick in WTI futures last week led to further declines in distillate cracks across the board.
We can attribute some of this to a relative rise in gasoline futures, however even the summer RB/WTI couldn't keep pace with the slight uptick in WTI prices last week (red line below = apr-sep 2020 RB/WTI summer crack strip).
It is certainly concerning that distillate/jet and gasoline prices were unable to keep pace with oil's bounce off of the $50 level. In last week's report we were looking for signals that markets were trying to form a bottom, this week it appears as if the move up in oil prices may not be sustainable.
Another source of market pressure can be seen via open interest figures. The pattern of reduction of net length by speculators has been dominant all year (chart on the right). While money managers favor length in Brent over WTI, total overall open interest still favors WTI by about 200k contracts (chart on the left as of the February 18, 2020 commitment of traders reports).
Take note however that the net speculative length (held by money managers) in Brent futures over WTI is close to it's highs. Should this unwind, Brent/WTI spreads could take a hit.
Regardless, backwardation in term markets persists. Below we see the performance of the second half of calendar 2020 (July-Dec) spread to the calendar 2021 strip. This spread briefly flirted with a dip into contango as flat price sold off, as in BRIEFLY. The previous 2 times this spread flirted with the zero-line and rebounded. Flat prices in WTI followed suit with a move back above the $55 level.
We believe this initial attempt to hold on to spread backwardation is fueled by hopes that either the demand destruction caused by the coronavirus will have resolved by the 3rd quarter or further OPEC+ cuts will be implemented to offset demand losses. The market is trying to get it's 'timing' right and we can see this in the current structure of 1-month calendar spreads.
So far this year, the front-month calendar spread in WTI has gone off the board weak. As of Friday, February 21st futures settlements, the front 2 month spreads are weak with a return to backwardation by the June/July-2020 spread. This will either be pushed further out on the curve or brought forward as details about the supply/demand imbalance emerge and impacts on inventory levels become clear. Historically, this is the time of year the product inventories begin to draw-down seasonally (green lines = 2020 inventory levels).
The EIA inventory report for week ending February 14, 2020 reported a total inventory DRAW of (2.10) million barrels with Crude oil showing a slight build.
Year-to-date, this bring us to a Total Inventory BUILD of 20.80 million barrels.
As noted above, inventory LEVELS compared to this same week in previous years continue to show product inventories slightly above the prior 2-year levels.
Lee Taylor - Technical Levels
The weekly resistance area once again withstood Brent’s rally last week. Support on the weekly chart is 56.77 then 53.21. I would suspect that April Brent will hold this 56.46-56.77 area to make another attempt to the upside. If we settle below these levels, then I don’t see any reason that we won’t retest that 53.21 level. Resistance will be major above as 60.24 is the first resistance level on the weekly charts. April/May easily retraced back to .26 and even broke through .41. The front spread will now retest .41 but eventually moved back above .60. Just keep an eye on flat price for this spread – a move down to the .53 handle in Brent will force the spot spread to flirt with .26.
The crude oil market tried to rally above the 55.53 level late last week but then retreated on Friday to the 52.65 support level. If the market continues to retreat, the 52.65 will switch to resistance. Support can be found underneath at 51.89, 50.70 then 49.33. A weekly settlement below 49.33 projects to 42.51. If one looks at a weekly or daily chart, the spot month of WTI needs to break 55.47-55.62 to give traders any hope of sustaining a bullish rally. It appears that both March/April and April/May WTI have bottomed but resistance lies above at the teens. June/Dec was able to reach our objective of +.64 and even reached the next stage of +.91 but then came off as crude fell. Look to buy any pullback to +.42 and hop on board if it finally can settle above +.91.
March RBOB has tried to keep this market on an uptick but even it failed on Friday. March RBOB was able to rally last week above 1.6682 but unfortunately then retraced back on Friday under 1.6240; yet it was able to settle above. If it can’t stay above 1.6240 then we should see a quick move to 1.5797. I don’t think we have enough time to see it retest 1.49 handle; however, this market doesn’t appear to withstand all the negative fundamental news. March/April continues to have a mind of its own – as long as it can settle above -1167 it should expire in single digits. As I have said, be careful since there isn’t much support below and a failure of our level projects down to -1300. April/May and May/June finally broke out of their range. Look for a pullback in JK to 72.
The heating oil market may still have a date with 1.4666. Last week’s rally allowed the market to find support at 1.6536 on the weekly charts. April heat is beginning to become oversold but it might have to come off another six cents before it becomes a buy. Support will be found 1.6415 then 1.6215. June/Dec has yet to break above -360 to -350 and may retest -450 before it finally has the gusto to break to the upside..