China buying discounted crude filling up storage. Not so for LNG with little spare storage available.

[BLA + 1,666]

On January 24th the Brent contract price for March delivery settled at $58.29.

The virus concern was just starting to build.  The spot price continued to drop. 

The buyers that hold long-term contracts must notify producers the volume they will accept for delivery (March)  by the 10th of the following month (Feb 10) after the settlement date (Jan 24) 

As the virus scare built up the Brent spot price continued to drop to mid $50s by the 10th of February. During this window (Jan 24 to Feb 10) some Chinese refiners , mostly independent Teapots just couldn't take delivery. Oil, LNG and other imports (food) were backing up offshore China.

The buyers had to make commitments on Feb 10th.  MANY CHINESE FIRMS COULDN'T PASS UP BRENT BELOW $60 AT THE MARCH DELIVERY CONTRACT PRICE OF $58.29. I heard of producers/sellers offering discounts of over $2.00 off the contract price.  This is unheard of where a $0.50 discount is considered extremely large.  So on February 10th , commitment date, the Chinese starting buying for storage as the price bottomed that day. 

From January 24 to Feb 10 the independent International Trading Firms were buying up highly discounted oil and storing it in South Korea and floating storage.  

As I heard before, as of the begining of the year there was approx 180 mm bbls of available crude oil storage capacity in China. Most all of that 180 mm bbls capacity will be filled with the discounted February and March oil deliveries.  

As the OP article stated Vitol estimates  200 mm bbls lost demand Q1 .   That sounds about right.  Much will be stored in Asia, mostly China. Some believe that some will even be backed up to storage in OPEC country's storage. 

Vitol CEO estimated Chinese consumption now down about 4  bbls/day.  A 600k/day cut by OPEC+ will not make up for that loss, even with Libya and Venezuela.

https://oilprice.com/Energy/Energy-General/Oil-Trading-Giant-Sees-Oil-Price-Recovery-Later-This-Year.html 

Watch the pricing approaching and up to March 10th when buyers will have to commit to volumes for April deliver.  

1. Will virus show decline ? How much ? That's if you believe the stats China releases.  

2. How much available spare storage capacity will be available for April delivery ?  In China ? Outside China ? Could most of excess oil storage capacity be filled by April.  If yes what price of oil would that result in ? 

3. What will OPEC+ decide at March meeting ? Does Russia play along (probably) ?  Watch for news leaks and positioning before the meeting 

4. Even if the virus disapates by April how long will it take to (1) Chinese people to feel comfortable to get back to work (2) for air travel to normalize (3) for business to return to pre-virus levels.  WHICH BRINGS UP THE ULTIMATE QUESTION  how long will it take to lower inventories that have been building up during the virus outbreak ?

5. Will growing virus hotspots in Japan, South Korea and Northern Italy lead to an all out Pandemic ?

There are a lot of unknowns.  Many have become complacent and believe the virus is Contained, Reversible and Temporary.  Place your bets. It's anybody's guess.

Vitol believes Brent rebounds second half of year.  Possibly to $70 bbl. ? ? ?  Always consider the source of the data.  Consider the source. Most everyone has an agenda.

We can only analyze the data points and try to determine  the validity of China's updates to.make our best guess. 

WHAT ABOUT LNG ?

Not the same for LNG.  The problems with LNG are threefold. THE PERFECT STORM

1. Unusually warm winter weather in North America, Europe and Northern Asia.

2. China Coronavirus drcreased demand

3. Unlike oil, there is very little LNG spare storage capacity . 

Even without the three concerns above there is way too much Natural Gas production to begin with.   The world's demand will continue to increase but it could be a couple of years before the NG/LNG market comes back into balance.

Edited February 23, 2020 by BLA

[Wombat + 1,028]

6 hours ago, BLA said:

On January 24th the Brent contract price for March delivery settled at $58.29.

The virus concern was just starting to build.  The spot price continued to drop. 

The buyers that hold long-term contracts must notify producers the volume they will accept for delivery (March)  by the 10th of the following month after the settlement date (Jan 24) 

As the virus scare built up the Brent spot price continued to drop to mid $50s by the tenth of February. During this window (Jan 24 to Feb 10) some Chinese refiners, mostly independent Teapot refiners just couldn't take delivery. 

The buyers had to make commitment on Feb 10th.  CHINESE FIRMS COULDN'T PASS UP BRENT BELOW $60 AT THE MARCH DELIVERY CONTRACT PRICE OF $58.29. I heard of sellers offering discounts of over $2.00 off the contract price.  This is unheard of where a $0.50 discount is considered large.  

From January 24 to Feb 10 the independent International Trading Firms were buying up highly discounted oil and storing it in South Korea and floating storage.  

As I heard before, as of the begining of the year there was approx 180 mm bbls of available storage capacity in China. Most all of that 180 mm bbls capacity will be filled with the discounted Feb and March oil deliveries.  

As the OP article stated Vitol estimates  200 mm bbls lost demand Q1 .   That sounds right.  Much will be stored in Asia, mostly China. Some believe that some will even be backed up to storage at OPEC country's storage. 

https://oilprice.com/Energy/Energy-General/Oil-Trading-Giant-Sees-Oil-Price-Recovery-Later-This-Year.html 

Watch for pricing up to March 10th when buyers will have to commit to volumes for April deliver.  

1. Will virus show decline ? How much ? That's if you believe the stats China releases.  

2. How much available spare storage capacity will be available for April delivery ?  In China ? Outside China ?

3. What will OPEC+ decide at March meeting ? Does Russia play along (probably) ?  Watch for news leaks and positioning before the meeting 

4. Even if all was known how long will it take to lower inventories that have been building up during the night of virus ?

There are a lot of unknowns.  Many have become complacent and believe the virus is contained, reversible and temporary.  Place your bets. It's anybody's guess.

Vitol believes Brent rebounds second half of year.  Possibly to $70 bbl. ? ? ?  Always consider the source of the data.  Most everyone has an agenda.

 

WHAT ABOUT LNG ?

Not the same for LNG.  Their problems for LNG ate threefold. THE PERFECT STORM

1. Unusually warm winter weather in N. America, Europe and Northern Asia.

2. China Coronavirus hurt demand

3. Unlike oil, there is very little LNG spare storage capacity . 

Even without the three concerns above there is way too much Natural Gas production.  Demand will continue to increase but could be a couple of years before the NG market comes into balance.

Couldn't agree more! Only thing I think a bit wonky is 200mbb, I reckon it will be 300-400.

[BLA + 1,666]

15 hours ago, Wombat said:

Couldn't agree more! Only thing I think a bit wonky is 200mbb, I reckon it will be 300-400.

Your 300 to 400 mm bbls may be correct.  Nobody knows BUT my "guess"  is that this will all come to a head anytime between the end of April thru May with major price capitulation.

Just a guess.

Edited February 22, 2020 by BLA

[0R0 + 6,251]

On 2/21/2020 at 12:34 PM, BLA said:

4. Even if the virus disapates by April how long will it take to (1) Chinese people to feel comfortable to get back to work (2) for air travel to normalize (3) for business to return to pre-virus levels.  WHICH BRINGS UP THE ULTIMATE QUESTION  how long will it take to lower inventories that have been building up during the virus outbreak ?

 

I think there will be a strong upsurge in demand for the next two years if not a bit longer, after the China quarantine and the containment of spread in Japan and S. Korea and Europe. . 

The driving force is not the China recovery but a steep acceleration of the exodus of supply chains out of China. Transnational companies are now considering China not only as a growing expense, but also an unreliable source, and now uninsurable as well. That means that target new sourcing nations in ASEAN, Taiwan India Mexico US etc. will require a large wave of infrastructure construction, industrial and transport equipment, and training as source production from China is duplicated outside it, with a sharp preference for non-Chinese control. About $2.5 Trillion of Chinese exports will be gradually cut down for parts assemblies and basic materials. I don't know how far it will go, but it will be substantial. Initial guess is that at least $1 Trillion/yr is on the table eventually. 

I am expecting that all of it will be powered by LNG and where possible also with renewables.  It will not be anywhere near the scale of demand we had from the $20 Trilion buildout of China's industries in 2000-2012, but it will be significant. Perhaps $3 T worth. Meaning about 3 Mob/d worth, primarily in LNG at the end, but starting off with lots of oil till prices rise back up.