The Van Trump Report

Why You Should Be Paying Close Attention to Crude Oil

Global and U.S. prices fell into bear-market territory yesterday, generally defined as a -20% decline from a recent peak. The fall marked a rapid reversal from three weeks ago, when escalating tensions in the Middle East drove prices to fresh highs. I’ve included a chart below that shows the recent fallout in crude oil. Prices have fallen to lows not seen in 13 months as oil demand falters as the death toll for the coronavirus continues to rise.  Oil’s price drop is not just market panic—demand is faltering, with China cutting its March orders from Saudi Arabia, and Sinopec is already cutting its refinery production this month by -600,000 bpd because it is seeing reduced demand. China’s oil demand will likely fall by -20% compared to normal demand this time of year due to the stringent restrictions on travel within China, and well as to and from China. This -20% would be roughly -3 million barrels per day, according to Bloomberg. In fact, energy consulting firm JBC cut its forecasts Monday for China’s oil consumption by -1 million barrels a day in February and March, amid signs refiners in the country have reduced their oil intake. “The first numbers out of China show losses to demand of three million barrels a day, and the extent of the virus is still unfolding. We’re nowhere near stabilization.” There’s also some fear that if oil prices continue to fall it could eventually put some energy companies in a more dire financial situation. I should also mention, Goldman Sachs downgraded ExxonMobil’s shares to Sell from Neutral, following another disappointing quarter. Exxon reported a drop in profits on Friday for the fourth quarter, weighed down by a deterioration in nearly every segment. Oil prices were weak, natural gas prices fell sharply, while profit margins for refining and petrochemicals also deteriorated. ExxonMobil would need oil prices to trade at about $100 per barrel in order for the company to pay for all of its spending and also cover shareholder payouts, according to Citigroup. As a result, the financial picture has darkened. Goldman slashed its price target for Exxon’s shares to $59, down from $72 previously. There’s just a ton of uncertainty building and brewing around the fossil fuel space  and how things are going to play out in the next decade. As an end-user, I like the thought of starting to lock in some fuel demand on the breaks. I don’t want to lock in the entire year but I think making some strong purchases on the new lows makes sense. 

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