Restarting China’s Economy

1. China tries to restart its economy

- China has begun to clear a backlog of container ships in an effort to jumpstart an idled economy.

- China processes about 30 percent of total global container traffic, and the coronavirus, and the subsequent shutdown of parts of the Chinese economy, have rippled around the world. About 715,000 containers typically pass through Chinese ports per day.

- Between February 11 and 17, Reuters says that the average wait time for a container ship at Zhoushan in southern China spiked to more than 60 hours due to the backlog, 20 hours longer than the average time in early January.

- Turnaround times are starting to improve at other ports as workers come back to the job. “The turning point has arrived... We are seeing that port congestion has eased and logistics start to revive,” Xu Kai, director of the Shipping Information Research Institute at SISI, told Reuters.

2. Jet and kerosene prices plunge

- The coronavirus pandemic is sinking commodity prices across the board, but jet fuel and kerosene are under particularly acute pressure as travel restrictions proliferate and the virus spreads beyond China’s borders.

- “[W]e have shaved off more than half of our global demand growth forecast for 2020 since January; it currently stands at just 50,000 b/d, vs 140,000 b/d in our previous forecast,” JBC Energy wrote in a note, referring to jet and kerosene demand growth.

- “The bearish demand sentiment could easily keep spot regrades near recent lows or drive it even lower over the next several months, especially as the seasonal upside to demand in the Atlantic Basin is not expected before April-May,” the firm added.

- But JBC said that prices are starting to look “undervalued” and “a prolonged weakness here risks a temporary spike.”

3. U.S. LNG curtailment?

- The global glut for natural gas was growing worse before the coronavirus, but the pandemic is magnifying the surplus. Prices have collapsed in all major basins, with JKM prices (Asia) falling below $3/MMBtu.

- “We continue to see increasing risks that US LNG export shut-ins are required to balance global gas markets, though this is not at this point our base case,” Goldman Sachs wrote in a note. “We would argue the US LNG export arb remains open, albeit narrowly, and that the recently reported cancellation of two US LNG cargoes likely reflect opportunistic moves by off-takers taking advantage of individual cargoes offered at a deep discount to TTF.”

- In other words, it is barely profitable to export LNG from the U.S. to Europe at these prices. Some buyers recently paid a penalty to cancel cargos, and while that does not necessarily portend more widespread shut-ins at the moment, it is also not a great sign.

- If the market keeps trending in a negative direction, there will be more pain for U.S. natural gas drillers.

- “Should the US LNG export arb shut on a sustainable basis, wesee risks of a race to the bottom among global gas prices that would ultimatelylead to Appalachia gas production shut-ins with Henry Hub likely in a$1.50-$1.75/mmBtu range depending on Northeast basis levels,” Goldman concluded.

4. Could oil demand growth fall to zero?

- Oil demand growth is expected to contract in the first quarter, the first time that has occurred since the global financial crisis a decade ago.

- It is no longer just a problem of Chinese demand. “Looking at other countries in the region, we note that demand growth in other large consumers including India and Indonesia has already dropped materially in 1Q20,” Bank of America Merrill Lynch wrote in a note. “And Japan and Korea will likely also be affected going forward due to recent spikes in COVID-19 cases there.”

- The big question is how long the pandemic lasts, and, obviously, nobody has an answer to that. But some analysts have put out some grim estimates for demand growth. Several numbers put growth in the range of 0.5 mb/d, down more or less by half from middle-of-the-road estimates at the start of the year.

- However, FGE, a consultancy, said that global demand growth could be zero for all of 2020.

5. Gold prices shoot up

- Gold prices have surged in the last few weeks on fears of economic slowdown. As of Thursday, spot prices traded near $1,650 per ounce.

- “Concerns about the Covid-19 virus, which is now spreading rapidly in countries such as Italy and South Korea, are driving up risk aversion among market participants and allowing gold to soar higher and higher,” Commerzbank said. “Gold has climbed to $1,680 per troy ounce as the new week begins, putting it at a new seven-year high,” the investment bank wrote on Monday.

- “The upswing in the gold price is being accompanied by further ETF inflows,” Commerzbank wrote. “[A]ccording to the CFTC’s statistics, net long positions were expanded by 22% to a 2½-year high in the week to 18 February.”

- The bank added that the surge in gold speculation also means that the price upsurge is on “shaky ground,” which could result in profit-taking.

6. Spike in volatility

- Consecutive days of steep drops in the market translated into a surge of volatility. The CBOE Volatility Index (VIX) index spiked.

- “Options traders are suddenly pricing in the potential for wider swings over the next 30 days,” Sundial Capital Inc. President Jason Goepfert wrote in a note Monday.

- Known as Wall Street’s “fear index,” the VIX surge is a direct follow-on from the panic spreading through the market.

- The VIX just about doubled in value since last week.

- The futures curve is also in backwardation, meaning that short-term contracts are more expensive than longer-dated contracts. That is unusual and reflects a state of uncertainty in the market.

7. Gasoline prices fall

- While the global economy may suddenly be on the rocks, the flip side of a meltdown in commodity prices is cheaper stuff. Motorists are set to enjoy much cheaper gasoline.

- Average retail gasoline prices are down 50 cents per gallon from a year ago in some places, which could cushion the blow of slower economic growth.

- IHS Markit Ltd.’s Oil Price Information Service estimates that the average U.S. household consumes 100 gallons of gasoline a month, so the 45-cent decline in prices over the last nine months could save the average household $540, as the Wall Street Journal pointed out.

- However, upstream oil and gas production is an important part of the economy, so the financial vice that producers now find themselves in could translate into a slowdown in places like North Dakota, Texas and Pennsylvania.