Oil Traders, Not OPEC, Will Decide If Worst Is Over For The Market
Investing.com | Oct 27, 2020 05:57AM ET
Saudi Energy Minister Abdulaziz bin Salman likes to throw a little humor and taunting into serious talk when he feels he has to give an important message on oil.
“Make my day,” he told oil bears in September using the renowned Clint Eastwood line that warned of the doom that befell the bad guys who tried to take on Hollywood’s most-feared cop.
On Monday though, he tried to sound more factual than fun when he declared “the worst part is over” on his outlook for oil demand.
But a casual glance across the oil consumption map and the map for coronavirus hotspots suggests that a new worse period for oil demand is just beginning.
A month after its peak summer driving season, the United States is still reporting weekly crude draws, which, in theory, is great for oil bulls. But look beyond the headlines and into the weekly spreadsheet provided by the Energy Information Administration and one will see the cogent picture of demand driven by U.S. crude exports into one main growing area: China.
The United States is now China’s fourth largest crude supplier. The Chinese market itself has become the single biggest for American oil. U.S. exporters ship out about 3 million barrels of crude on the average a week and China gets almost a half of that at times.
Latest EIA data from September reveals that in May, some 1.3 million barrels of U.S. crude landed in China. But despite its importance, China isn’t the only market for U.S. oil. Exports to Canada, another key market for U.S. crude, fell 19% in the first half of this year compared with the same period of 2019. Exports to South Korea slumped by 27%.
Gasoline Underperforming, Jet Fuel Cratering
And while crude sales are very important to any oil producer, the other key components of the global oil market—diesel and jet fuel which dominate consumption in the trucking/transportation and aviation sectors, respectively—have been tanking.
John Kilduff, founding partner at New York energy hedge fund Again Capital, told Investing.com that while gasoline stockpiles have fallen in five of the seven weeks since the start of September, actual demand for the motor-fuel was below seasonal norm:
“We had a bright spot a couple of weeks ago when we actually had a near-normal demand week, when uptake of gasoline hit a hair above nine million barrels. Since then, it’s done nothing but come down. You look at the COVID-19 map and you’ll see a correlation between the hotspots there and the red in gasoline prices.”
It was a similar depressing picture with jet fuel, with hopes raised when U.S. airlines were logging about a million passengers a week before coronavirus caseloads began exploding again in the United States, Britain, France, Spain and Italy.
Kilduff adds:
“With jet fuel demand already cratering, any hint of a more widespread lockdown in Europe will really do oil in.”
After an unprecedented drop in air travel due to the coronavirus, passenger airlines are being forced to make long-term, make-or-break decisions at a time of great uncertainty and minimal cash flow. Demand for jet fuel is considerably smaller than gasoline or diesel consumption. Still, it represents a sizable chunk of the oil market and one that was growing quickly before the pandemic.
The world burned 8.1 million barrels of jet fuel a day in December last year, the final full month before coronavirus disrupted travel and trade, the Wall Street Journal speaking a week ago , did not rule out cooperating with Saudi Arabia to extend current OPEC+ output cuts of around 7.7 million bpd.
Back in March, the two oil giants became bitter rivals briefly, after Putin refused to support Riyadh on output curbs at the height of the COVID-19 outbreak. The resultant all-out production war between the two drove the U.S. crude market into a historic negative $40 per barrel by end-April before talks brokered by President Trump brought OPEC+ back into a deal.
It is a reflection of how far the alliance has come since then that prompted minister Abdulaziz to guess on Monday that “the worst part is over” for oil, adding that OPEC will remain “vigilant” as a group.
But with the wildfire-like coronavirus spread and the Iranian wild card beckoning, a new worse era may just be starting for OPEC and oil prices.
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