Numbers Game

Markets are back on the defensive after a risk-on day. The main reason is the numbers game. The number of reported cases of the novel coronavirus (Covid-19) said from China, that is. China, because of a new way of counting, increased the number of infections ten-fold or more than 15,000 new cases, causing markets to reduce some of its optimism that we can start pricing in a return to normal.

Also, numbers by the International Energy Agency (IEA) are suggesting that, “Global oil demand has been hit hard by the novel coronavirus (Covid-19) and the widespread shutdown of China’s economy. The IEA says that demand is now expected to fall by 435.000 barrels a day (MB/d). Year over year in the first quarter of 2020”.

According to IEA, it would be the first quarterly contraction in more than ten years. That led the IEA to cut its 2020 growth forecast by 365 kb/d to 825 kb/d, the lowest since 2011. Lower-than-expected consumption in the OECD trimmed 2019 growth to 885 kb/d.

The IEA also said that the coronavirus outbreak led them to revise down the outlook for global refinery runs. Chinese crude outputs for 1Q20 have been cut by 1.1 MB/d and are now expected to contract by 0.5 MB/d year-on-year. As a result, global runs are forecast to expand by just 0.7 MB/d in 2020. They also point out that the launch of IMO’s new bunker fuel regulations in January boosted simple refining margins based on sweet crudes.

Still oil is trying to stay positive despite this, as perhaps a lot of this has already been priced in. Oil led the coronavirus fear sell-off and despite the disturbing news from China and the IEA, it is trying to defend and base near this bottom.

Oil also stayed positive despite a massive jump in crude oil inventories, as reported from the Energy Information Administration (EIA). The EIA reported a big surge in oil stock of 7.5 million barrels. Yet despite the substantial increase, oil stocks are still 2% below the five year average for this time.

The market got support from very bullish product numbers. The EIA distillate fuel inventories decreased by 2.0 million barrels last week and are about 5% below the five year average for this time of year.

Gas inventories also dropped by 100,000 barrels and are about 3% above the five year average for this time of year.

The other reason the oil market seemed to shrug off the build and focus on the more supportive product numbers was the fact that the EIA had a big adjustment in crude oil inventories. Adjustments that might suggest that U.S. shale oil production is peaking.

Industry expert Tim Dallinger says that, “The biggest thing that stands out in this latest report is the adjustment number. As you might recall, the adjustment figure has been a source of mystery. The calculation is “Production + imports – exports – refinery input +/- Adjustment = Inventories.”

The adjustment number is a correction factor added when all the inputs to the supply equation doesn’t balance. It just merely shows something is wrong with some input of the model. The EIA derives the Weekly Petroleum Status Report( WPSR) weekly number on U.S. production primarily from the Short Term Energy Outlook (STEO). Because the STEO is aggressive, the weekly is going to show a high production number regardless of what is actually happening in the field. The EIA maintains that crude inventory levels are tracked independently. Several independent shale production tracking services are showing U.S. production is actually in decline.

Tim asks, “How would we be able to tell, besides waiting on post-dated the EIA monthly 914 production reports? Well, if the STEO is too aggressive and inventories are accurate, the adjustment will need to flip negative to cover the WSPR production “over-counting.” This week was the first week in some time that the adjustment really substantially trended lower. It’s been an order of magnitude larger in the past year. If this starts to be a trend, the theory that U.S. production is falling may really have legs.

Tim says that, “Granted, I still maintain that a non-insignificant component of the adjustment and/or production figure includes been blended condensate and other natural gas liquids “NGL’s” mistakenly counted as crude.”

In other crude news, Russia says that it has not decided on additional OPEC+ output cuts yet. It is so hard for them to make up their mind. The rest of the cartel is ready to cut. Stay tuned.