The GERM Report

-Libyan production is not the same as Libyan exports.

-The rally in crude oil prices may be technical in nature.

-Oil prices may be supported by a fire at an Exxon refinery in Baton Rouge.

Crude oil prices were on pace for the third straight day of advances in early Wednesday trading amid signs the spread of the coronavirus was slowing. Also contributing to gains is pressure on US shale from the low-price environment. And we still don’t know of plans for coordinated action from OPEC+, though inaction now could leave the market exposed to heightened volatility.

Brent crude oil was selling for $55.17 per barrel as of 8 a.m. EST, up some 2.1% from the previous close and 3.6% higher than the monthly low of $53.27 per barrel. The gains come despite signs of a glut in the US market, with the American Petroleum Institute reporting a build of 6 million barrels for the week ending February 7. US federal data on inventories are out at 10:30 a.m. EST.

The spread of the coronavirus may have reached its peak, allowing markets to breathe a sigh of relief. On Wednesday, Chinese President Xi Jinping pledged stimulus to industries harmed by the virus, though demand may be suppressed through the duration of the first quarter. Commentary in the official Xinhua News Agency emphasized just that point.

“The sound fundamentals of the Chinese economy are unshakable amid the epidemic,” it read. “But that should not be the excuse for optimism without caution.”

The steady gains in crude oil prices this week may be reflective more of technical factors than real market issues. A casual read suggests Brent got a bounce after hitting support of around $53 per barrel on Friday.

In what should be pushing oil prices lower, economists at the Organization of the Petroleum Exporting Countries said the coronavirus, combined with economic weakness, prompted a downward revision of 0.1% for global GDP growth in 2020. The US economy slows from 2.3% in 2019 to 1.9% in 2020, Japan’s growth was revised lower by 0.1% to 0.6%, China’s growth was revised down by 0.5% to 5.4% and India was revised lower by 0.3% to 6.1% for 2020.

Those contractions led OPEC economists to revise their forecast for global oil demand growth lower by 230,000 barrels per day. If accurate, that would mean proposals from OPEC+, if accepted as tabled, would more than compensate for the demand destruction. That does not, however, account for the eventual return of Libya, which was exporting more than 1 million bpd before internal conflict shuttered most of its ports.

“It should be noted that the significant decline in Libyan oil production and exports in January have had a limited effect on oil prices,” OPEC economists wrote in the monthly report for February.

Secondary sources reporting to OPEC economists pegged Libyan production at 796,000 bpd in January, down a quarter million barrels from December. Production, however, is not the same as exports and should Libyan ports reopen, it would contribute to the supply-side strains that manifested in the fourth quarter. OPEC+ has yet to agree on a policy to address the decline in demand, though the fact that Libyan outages and force majeure in Nigeria had little market impact shows the choices may be inherently difficult. OPEC+ could have easily issued a note saying it was carefully monitoring the situation stemming from the coronavirus. Demand constraints may be temporary, so the lingering indecision leaves the production group looking somewhat irrelevant.

Supporting the rally somewhat is a fire at Exxon’s refinery in Baton Rouge, the fifth largest in the United States. Elsewhere, a marketing official at Boeing’s commercial division said Wednesday it would be “really tough” for the segment to grow this year because of the virus-related constraints in China. Xinhua’s commentary suggested the setbacks would be offset by growth later in the year, but the damage may have already been done. That’s bearish for oil. For the bulls, Energy Intelligence notes that US shale producers may have a rough go of it if oil prices continue to hold at current levels. But if OPEC+ acts, or the price recovery continues, that would turn into a bearish factor should shale production accelerate in kind.