The Energy Report 03/25/2020
$2 Trillion Reasons
There are two trillion reasons why oil will not go to zero, but we may not be out of the woods yet. Reports from both the White House and Congress suggest that an agreement has been made on a record two trillion-dollar stimulus package against a backdrop of record quantitative easing from the Federal Reserve. This incredible amount of stimulus should support oil even though right now, the fundamental picture looks very bearish. Yet the biggest up day in stocks since 1933 was led by the energy that had been obliterated.
Yet data from the American Petroleum Institute (API) suggests that the full impact from the slowdown has not hit inventory data just yet. The possibility that parts of the U.S. may reopen for business by Easter may allow the market to look past what will be massive increases in supply. Refinery run cuts and massive capital spending cuts should choke future supply builds. The API reported crude supply down 1.2 million barrels. Distillates were down 1.9 million barrels, gasoline supply down 2.6. Still, storage is always a fear.
On top of that, the standard switch over to summer blends of gasoline will be hampered because refiners have no incentive to beef up supplies ahead of summer. President Donald Trump told Fox News that he wants the nation “opened up and just raring to go by Easter.” Many believe that is not possible but perhaps we can in some parts of the country.
So If President Trump gets his way and the U.S. is open for business just as summer blend season starts, then we could, believe it or not, be looking at a supply picture that is much tighter than the record low RBOB that we see this week.
Russia may be pulling back in the production war, at least partly. The Wall Street Journal reports, “The deepening coronavirus crisis is upending the Kremlin’s plan to ramp up oil production in its price war with Saudi Arabia—and prompting a backlash among the leaders of some of Russia’s largest energy companies, people familiar with the matter said.”
The CEO of Vitol says oil demand could fall by 5 million barrels a day. India is now shutting down with another big wave of oil demand destruction. That is huge.
Bloomberg News reports that, ”Some buyers of Saudi crude in North America have cut their April nominations after Aramco slashed freight rebates.” In other words, if you have to pay more for shipping, they are telling the Saudi’s to keep their oil. It’s a buyers market.
There are reports that China has resumed the construction of 90% of its major infrastructure projects. That, along with a stimulus-related break in the dollar, should stop some of the worst-case scenarios for oil. For other commodities such as food and industrial metals, this QE with two trillion of the stimulus should be explosive.
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