Oil prices fell sharply in response to a dramatic drop in prompt crude demand from China

The demand impact that the coronavirus has had in China is rippling through to much of the rest of the complex

 

London, 11 February (Argus) — Oil prices fell sharply in response to a dramatic drop in prompt crude demand from China, much of which remains in the grip of the coronavirus.

 

Mideast Gulf marker Dubai registered the steepest losses of the three global benchmarks, falling by $4.10/bl to $52.77/bl between 31 January and 10 February. Atlantic basin North Sea Dated $3.44/bl to $53.02/bl in the week to 6 February, while US benchmark WTI slipped by $1.99/bl to below $50/bl.

 

Markets rallied slightly last week after the Opec+ Joint Technical Committee provisionally agreed on 6 February to recommend a production cut of 600,000 b/d in the second quarter, after convening an emergency meeting to discuss ways to counter the impact on prices of falling Chinese demand.

 

But not even this has been enough to mitigate expectations of growing stock pressures and price declines, causing a change in time structures. The North Sea market has tipped into contango, with prompt values 4¢/bl below the third month. Ice front-month Brent has fallen to its lowest level relative to the month three contract since December 2018. Even Dubai swaps, at steep premiums to forward contracts for months owing to voluntary and involuntary supply cuts, are now flirting with contango, with the front month swap settling just $0.02/bl above month three on 10 February. Dubai is considered a bellwether for demand in Asia-Pacific.

 

Up for resale

Angolan crude differentials to North Sea Dated are also tumbling, as the market's core Chinese buyers resell cargoes. Sinopec trading arm, Unipec, tried to resell five cargoes from 30 January to 4 February, without success. Other firms have had to reduce their asking prices to sell Angolan cargoes. State-owned Sonangol sold a February-loading cargo only after cutting its offers by 70¢/bl. Norway's Equinor sold cargoes of Dalia and Pazflor after reducing offers by $0.70-1.60/bl.

 

Saudi Arabia, Abu Dhabi and Qatar have cut many of their formula prices for exports to Asia-Pacific, but Abu Dhabi and Qatari crudes continue to trade on the spot market at discounts to their respective official prices. Omani crude has fallen close to parity with Ice Brent futures on the Shandong spot market, from $6/bl premiums in January.

 

WTI's premium to Dubai swaps in northeast Asia has fallen despite China's decision to halve the tariff rate on US crude imports from 14 February. Chinese refinery runs are likely to be at least 2.5mn b/d lower this month than in January. Vessel queues are growing outside choked ports and the country is struggling to digest imports.

 

But US light sweet waterborne crude prices have strengthened as collapsing Libyan production opens up a clear opportunity for competing US grades to supply Europe. Libyan output has fallen to below 200,000 b/d from 1.1mn b/d in December. WTI fob Houston firmed by 20¢/bl to a $1.20/bl discount to May Brent. The increased competition from US imports is driving light sour Forties down relative to North Sea Dated.

 

Swollen products stocks are Chinese refiners' most pressing problem. They cannot buy more crude until they start to drain their tanks, either by boosting domestic sales or exports. While some businesses reopen on 9 February, many schools, offices and factories will remain shut until mid-month — and the skeleton workforces still manning Chinese shipping terminals are struggling to load product for export. Jet fuel markets are also suffering as flights to and from China halt. Front-month Singapore jet swaps dipped below month two and refining margins fell, briefly, to a 10-year low.

 

But, globally, refining margins are well supported — by cheaper crude, turnarounds and the diversion of VGO to 0.5pc marine fuel oil production. In Europe, refining margins have risen dramatically since December. In Singapore, gasoline swaps have jumped to their highest against the month-three contract since mid-December. Catalytic cracker run cuts are even bolstering US gasoline margins, despite record stocks. And US refiners are taking advantage of low high-sulphur fuel oil prices to boost imports from Europe.

 

Variable impacts

The duration of the disruption is a wildcard but the short-term loss in demand from China is clearly severe, and appears especially acute in south and east China, the areas worst-hit by coronavirus. Even if Beijing gets the virus under control swiftly, hefty oil stockbuilds in the first quarter will weigh for some time on a market already trading crude for delivery to Asia-Pacific in April. The prospect of rising exports from China will transfer much of that price weakness to the products markets in the months ahead. The Joint Technical Committee's base case sees the coronavirus cutting global oil demand growth by 200,000 b/d this year, while BP sees a 300,000-500,000 b/d impact.

 

Source:Argus

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