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Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations

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Is This Oil Rally Justified?

Oil rallied on Tuesday morning, along with equity markets after the U.S. Federal Reserve announced an emergency rate cut of 50 basis points.

The news sent major indices rallying, with the S&P500 and Dow briefly jumping, before handing in its gains once again. Gold prices also rose on the news.

Oil prices already saw some positive action early on Tuesday after OPEC and its partners, on Monday, hinted at additional production cuts to the tune of 1 million bpd. Some of the cartel’s most prominent members, including Saudi Arabia and the UAE have been vocal about the need to support crude markets.

Saudi Oil Minister Prince Abdulaziz warned the group not to be complacent about the impact of the coronavirus outbreak on oil demand, which will result in lower export volumes from the Kingdom to Asian customers in the month of March.

While OPEC seems concerned about the demand side, pundits are debating whether the cartel is doing the right thing by making deeper output cuts. Despite the panic and the decline in refinery run rates, it seems that China has seized the opportunity and filled storage tanks at a sharply reduced price in February.

S&P Global Platts quotes Bernstein analyst Neil Beveridge as saying that "While there was [a] pronounced 40% drop in oil imports in mid-February [around 4 million b/d], we have seen oil imports rebound since then. Data over the past few days indicates that oil imports are now back at 10 million b/d or 40% above where they were last year,". Beveridge also said that inventory data showed a 20 million-barrel increase since the start of this year. Related: Russia’s Oil Production Rises Ahead Of OPEC+ Meeting

With crude stocks rising sharply then, the main question is when Chinese refiners ramp up activity to absorb this build in inventories.

Given the positive developments in other industries; Starbucks is brewing cups of coffee again at 85% of its Chinese coffeeshops, Toyota has restarted production at its Chinese plants, and refiners are expected to follow suit, and resume operations.

In the meantime, the eyes of the world are focused on the further spreading of the coronavirus in Asia and Europe. As crude stockpiles in China continue to build, the question is how fast demand for motor fuels and shipping fuels will recover. A slow recovery could cap oil prices, even if OPEC decides to make additional output cuts, while a quick pickup in demand could lead to a strong rally in oil prices, with Middle East and Russian crude blends such as DME/Oman, ESPO and Sokol set to gain the most.

OPEC is set to gather in Vienna on Thursday and Friday, limiting their number of delegates ‘’to a bare minimum’’ in order to mitigate ‘public health risks’. The group also said that media looking to cover the meeting wouldn’t be allowed to enter the secretariat’s premises, but that it would "keep members of the press fully informed of any decisions taken".

By Tom Kool of Oilprice.com

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  • Mamdouh Salameh on March 03 2020 said:
    Once the coronavirus outbreak is contained hopefully soon and the hysteria surrounding it is over we will be surprised by the rebound in the global economy, the oil demand and prices and particularly by China’s rebound. China’s economy will most probably behave like someone who has been starved of food. Its appetite for crude oil will be as rapacious as ever.

    One important observation is that just before outbreak oil prices were headed upwards underpinned by positive fundamentals in the global oil market and de-escalation of the trade war.

    The coronavirus outbreak is an aberration which soon will be a thing of the past. That is why any new production cuts or a deepening of existing ones by OPEC+ will be oil down the drain with no positive impact whatsoever on oil prices while the outbreak is raging and will only lead to a further loss of OPEC’s market share.

    And with OPEC’s oil production diving to a 10-year low at 27.84 million barrels a day (mbd), I am very suspicious of calls by the likes of the International Energy (IEA) for OPEC to deepen the cuts. These calls aren’t motivated by care for the welfare of OPEC members but by their own political agenda. For them, cutting more of OPEC’s production will lead to a reduction of OPEC's share in the global oil market and a weakening of its influence.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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