Factbox: Downside oil price risk remains as transportation-fuels demand slumps

New York —
Petroleum prices edged higher Tuesday, but downside risk remained as coronavirus cases continued to grow, drastically reducing travel and demand for transportation fuels.

Gasoline and jet fuel crack spreads have been especially hard hit, with some turning negative as governments increasingly close businesses and schools, while airlines slash flights.

Global coronavirus cases continue to grow. According to Johns Hopkins University, there were 414,277 confirmed cases Tuesday, up from 240,119 cases Thursday. Cases in China have flattened out at roughly 82,000, with the growth coming from the rest of the world.

Factbox: Coronavirus and Americas petrochemicals

In the US, 17 states have imposed stay-at-home orders, including states with the highest gasoline demand, such as California and New York.

India, the world’s third biggest energy consumer after China and the US, is also placing 75 of its 732 districts under lockdown from Monday until March 31.

Producers have responded to the low prices by revising their 2020 capex guidance lower, while refiners have responded to low transportation fuels demand and prices by cutting crude runs.

The current low-priced, $20/b crude environment is putting roughly 5 million b/d of high cost crude production at risk of being shut in, according to S&P Global Platts Analytics.

Marginal wells in the US and Canada totaling around 1 million b/d are “most vulnerable as operators are unable to cover operating costs or perform needed repairs,” said Rene Santos, a Platts Analytics analyst.

“Unless prices stay below $20/b for a sustained period of time, production losses will be much lower than” 5 million b/d, Santos said. However, at prices of $15/b or less for an extended period, “significant volumes of existing production could or would need to be shut in, at least temporarily until the markets stabilize.”

PRICES

**West Texas Intermediate crude was assessed by S&P Global Platts at $20.76/b Tuesday, up from $20.36/b Monday, but down 65% 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 Tuesday at around an $9.50/b discount to the 12th month contract.

**Western Canadian Select at Hardisty, Alberta, was assessed at $11.60/b Tuesday, underscoring the struggle many of the country’s producers will face to survive in the coming weeks and months.

**Atlantic Basin physical crude price differentials are weakening because of the refinery run cuts, with West African Djeno crude, for instance, assessed at a $4.55/b discount to Brent, down from a $1.50/b discount March 2.

**The Singapore jet crack spread against Brent ended Tuesday at just 7 cents/b, down from $11.34/b January 20.

**The Rotterdam jet fuel crack against Brent ended Tuesday at 32 cents/b, down from $14.17/b January 20.

**The New York Harbor jet crack against Brent ended Tuesday at minus 22 cents/b, down from $14.19/b January 20.

**The May NYMEX RBOB crack spread vs. ICE Brent ended Tuesday at around minus $5.80/b, down from $15.63/b one month ago.

**The May NYMEX ULSD crack ended Tuesday at around $18.27/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 Trump administration’s plan to buy up to $3 billion of US crude oil to fill the Strategic Petroleum Reserve remains a bone of contention holding up Congress’ economic aid package. If Congress rejects the plan, the oil market would lose access to capacity equivalent to about 77 million barrels of storage, or 8% of currently available commercial crude storage, said Bob McNally, president of Rapidan Energy Group.

**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.

**Platts Analytics forecasts “consistent and aggressive stock builds” at Cushing, Oklahoma, in the coming weeks. This would mark a shift in US crude storage patterns away from US Gulf Coast tanks, which have swelled 25.5 million barrels since early January as exports have averaged around 3.6 million b/d during that period.

**With refined products demand weak, 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.

**The spot export arbitrage for US crudes has started to reopen, with Platts Analytics calculations showing the WTI MEH arbitrage against Forties crude now open to Northwest Europe and Northeast Asia.

**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 their flights for the coming months, and jet fuel demand, which accounts for almost 8% of total oil demand, is taking an unprecedented hit.

**Singapore Airlines Group said Monday it was cutting 96% of its capacity through the end of April in the wake of travel restrictions, while the UAE’s Emirates, the world’s biggest long-haul airline, will suspend most passenger flights as of March 25, operating mainly cargo.

**The International Airlines Group, which includes British Airways, Vueling and Iberia, 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 Tuesday, with Suncor cutting its capital spending by 26% to C$3.9 billion to C$4.5 billion, and its output guidance by around 60,000 b/d of oil equivalent to 760,000 boe/d.

**Chevron is cutting its Permian basin output to roughly 125,000 boe/d, 20%, below prior guidance by year-end, and is slashing spending by 20% to $16 billion.

**Canadian producers Husky Energy and Suncor said they suspended construction of the West White Rose crude production platform project offshore of Newfoundland. Construction was more than halfway completed and was slated to come online in late 2022 to eventually produce about 75,000 b/d.

**European producers have joined in, with majors Shell and Total most recently announcing plans to cut capital expenditure by around 20% and suspend their share buybacks as part of a raft of measures to strengthen balance sheets.

**Refiners and midstream companies have also announced cuts, with Phillips 66 putting on hold two crude pipeline projects meant to deliver Permian crude to the US Gulf Coast: the Red Oak Pipeline and the Liberty Pipeline.

**Phillips 66 has cut its capital spending for 2020 across all its businesses by $700 million, to $3.1 billion, and cut back to minimum rates on its 13 refineries in the US and abroad.

**Phillips 66 cut rates at its 258,000 b/d Bayway refinery in Linden, New Jersey, by as much as 20%, while to the south Delta Air Lines’ 190,000 b/d Trainer, Pennsylvania, refinery began running at 150,000 b/d this weekend.

**A number of refineries in Europe have reported cutting runs, including ExxonMobil’s Gravenchon and Fos plants in France, and API’s Falconara plant in Italy.

**Italy’s Eni will review its projects in the Middle East, including deals with the Abu Dhabi National Oil Co. in the UAE, as it seeks to cut capital. Eni has a 25% stake in ADNOC’s Ghasha ultra-sour gas project and a 20% stake in ADNOC Refining among other projects.

**Refiners in Vietnam have been forced to lower their production capacity. 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.

**A plunge in 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. Pampa Energia, one of the biggest energy companies in Argentina, has postponed its drilling plans in Vaca Muerta, as low oil and natural gas prices curb profit potential, CEO Gustavo Mariani said.

**Brazilian state-led oil company Petrobras has postponed the much-anticipated sale of eight refineries, widened safety measures to ensure offshore production is maintained and tapped revolving credit lines to ward off the impact of the coronavirus pandemic. The refinery sales are the crown jewel of Petrobras’ asset-sales program, which aims to raise $20 billion-$30 billion for the company and fund continued development of the massive subsalt frontier over the next five years.

**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 is led by Enterprise Products Partners and Enbridge.