Factbox: Petroleum complex bounces, but downside risk remains as coronavirus saps demand

The petroleum complex bounced Thursday, but remained near the roughly 18-year lows set Wednesday, as a glut of supply has been met with reduced demand caused by measures taken to stem the spread of the coronavirus.

With government officials increasingly ordering people to remain at home and also closing borders, gasoline and jet fuel consumption have been especially hard hit.

Global coronavirus cases continue to grow. According to Johns Hopkins University, there were 240,119 confirmed cases Thursday, up from 179,165 cases Monday. Cases in China have flattened out, with the growth coming from the rest of the world.

Crude prices rebounded Thursday after US President Donald Trump suggested he will support the US oil industry by stepping into an ongoing Saudi-Russia oil price war "at the appropriate time."

Several lawmakers from Texas, North Dakota, Alaska and other oil states are directly lobbying Saudi Arabia, asking the country to reconsider its plans to flood the market with crude. Senator Kevin Cramer, a North Dakota Republican, has taken a stronger position, urging Trump to impose an embargo on oil imports from Saudi Arabia, Russia and other OPEC nations.

US Senator Chuck Grassley, Republican-Iowa, also urged the Trump administration Thursday to help the US biofuel industry weather plunging fuel prices and demand.

Outside of the US, Argentina's oil-producing provinces have asked the federal government to subsidize a minimum price of $54/b in a bid to sustain oil investment and production, warning of tax revenue losses if a plunge in prices this month cuts output. In the Vaca Muerta, the breakeven price is in the $30/b area for the half dozen or so projects already in full-scale development.

Producers have responded to the low prices by revising their 2020 capex guidance lower. According to S&P Global Platts Analytics, roughly 75% of the capex reductions are coming from the US, mainly in pure shale operations.

Some companies have announced lower production guidance for the year as well, although lower US output is not expected to materialize until the second half of the year, keeping a lid on prompt prices.

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PRICES

**West Texas Intermediate crude was assessed by S&P Global Platts at $25.22/b Thursday, up from $20.37/b Wednesday, but down over 50% from January 20, when commodities markets first began reacting to the virus.

**Crude futures have moved into steep contango, which should encourage storage increases, with the NYMEX front-month contract closing Thursday at around an $8.00/b discount to the 12th month contract.

**Western Canadian Select at Hardisty, Alberta fell to a record low $9.38/b Wednesday, underscoring the struggle many of the country's producers will face to survive in the coming weeks and months.

**The Singapore jet crack spread against Brent ended Thursday at just $1.11/b, down from $11.34/b January 20.

**The Rotterdam jet fuel crack against Brent ended Thursday at $1.60/b, down from $14.17/b January 20.

**The New York Harbor jet crack against Brent ended Thursday at minus $1.59/b, down from $14.19/b January 20.

**The May NYMEX RBOB crack spread vs ICE Brent ended Thursday at around 36 cents/b, down from $15.50/b one month ago.

**The price of FOB Singapore 92 RON gasoline, the most liquid gasoline benchmark in Asia, was assessed at $23.07/b Thursday, an 18-year low.

**The May NYMEX ULSD crack ended Thursday at around $15.70/b, holding up relative to RBOB on confidence that industrial demand would not suffer the same fate as driving demand.

**US ethanol margins have sunk further below zero, meaning many ethanol plants are losing money on every gallon of the biofuel they produce. And with ethanol prices far exceeding those of gasoline, blenders will lose any incentive to blend more than just the ethanol volumes required under the Renewable Fuel Standard.

TRADE FLOW

**The US Energy Department Thursday formally requested to buy up to 30 million barrels of sweet and sour crude from US producers for the Strategic Petroleum Reserve, the initial step in the Trump administration's plan to lessen the impact of low oil prices on domestic operators by filling government stocks to capacity. Deliveries of the crude were expected to begin as soon as April and will likely run through June, DOE said.

**Low crude price have encouraged increased shipments of Middle Eastern crude, with more Saudi Arabian barrels lined up for the US.

**However, refined products demand is weak, and several refiners in North Asia declined offers from Middle East producers for additional crude volumes to their allocated April term barrels, despite low oil prices. Japanese refiners are still mulling whether to increase crude oil purchases from Saudi Arabia and the UAE for May loading programs, after seeing no room for additional intake from the Middle East for April.

**With Saudi Arabia and Russia in a pricing war to flood the market with cheap crude, the crude contango has widened, encouraging global inventory builds.

**Over the next few months, Platts Analytics sees global "massive" crude stock builds of 500 million barrels in its best case scenario, compared with the 1 billion-barrel build in its worst case scenario, relative to end February levels.

**The flood of low-priced crude on the market has closed the spot export arbitrage for US crudes, with Platts Analytics calculations showing the WTI MEH arbitrage shut to Northwest Europe, Northeast Asia and Singapore.

**US shale is particularly exposed to lower oil prices. Under a worst-case average WTI price of $35/b for 2020, US crude production would drop to 9.75 million b/d in 2020 on the year, from a current reference case of 12.95 million b/d and $54/b WTI, according to Platts Analytics, a loss of 3.2 million b/d. That would result in the first yearly oil output decrease since 2016.

**Saudi Aramco will pump at its maximum 12 million b/d crude production capacity and draw 300,000 b/d from storage in April, under its plan to supply the market with 12.3 million b/d in the month, CEO Amin Nasser said.

**Future months' supply was yet to be determined, but Nasser said the company would be able to maintain production at its maximum capacity for a year without any further investment.

**Some of the world's biggest airlines are slashing more than 70% of their flights for the coming months, and jet fuel demand, which accounts for almost 8% of total oil demand, is taking an unprecedented hit.

**The International Airlines Group, which includes British Airways, Vueling and Iberia, announced Monday that it plans to reduce capacity by at least 75% compared with April and May 2019.

OPERATIONS

**Permian Basin and Canadian oil producers continued their budget-slashing sprees on Thursday, cutting anywhere from 25%-50% of their capital dollars, although their projected production volumes are only falling by up to 10% or so.

**Midland-based Diamondback Energy said Thursday it would slice its capital spending by more than 40% and pull more than half of its drilling rigs, while Canadian Natural Resources said it would cut its spending by 27% and delay a lot of new activity.

**ConocoPhillips CEO Ryan Lance said the company could become an interested buyer of distressed companies and assets once prices begin to stabilize. "The rationale for consolidation in this sector only got stronger with this downturn," he said. "We're watching, we're paying attention, but it's got to fit the financial framework."

**Norway's DNO said its operations in Kurdistan are being curtailed by the virus, which will lead to a drop in production from several fields. Production at the Tawke and Peshkabir fields is already set to dip below 115,000 b/d as the number of active drilling rigs will drop to two by the end of March from six at the start of 2020.

**The Port of Houston has shut down both of its container terminals - Bayport and Barbour's Cut -- after a worker who had been at the sites tested positive for COVID-19, and has no timeline on a return.

**Refiners in Vietnam have been forced to lower their production capacity as they grapple with weakening demand due to the coronavirus pandemic. State-controlled PetroVietnam's Binh Son Refining and Petrochemical, or BSR, has cut the capacity of its 148,000 b/d refinery at Dung Quat to 105% down from 108% before the end of February, an official from BSR said Tuesday.

**US refiners are keeping eye on margins as they consider run cuts in light of falling demand, while firming up operational plans to deal with any possible positive diagnosis of the virus at their plants. Inland refiners, like those in the Midwest, are most at risk, because they have limited outlet for their products, even though they have good access to price-advantaged crude from the Bakken, Permian and Western Canada.

**"As long as margins are positive and you are not at tank tops -- run," said Rick Joswick, global head of pricing and trade flow analytics at Platts Analytics. Joswick said if refiners lose the demand in their own market and can't sell elsewhere, they may be forced to cut rates, citing inland US refiners and those in Europe as those most at risk.

**A plunge prices has slashed the profit potential for oil production in Argentina, raising concerns that a cutback in investment could stymie the development of Vaca Muerta, its biggest shale play -- and one of the largest in the world. In response, the federal government is studying measures to sustain production.

**With US crude exports expected to fall, most of the nearly 10 offshore crude export projects initially proposed in the Gulf of Mexico will likely not be built. Port of Corpus Christi CEO Sean Strawbridge only sees a couple of them coming to fruition: Bluewater and the SPOT terminal offshore of Houston that's led by Enterprise Products Partners and Enbridge.