Oil prices decline in face of China's Covid-19 infections, reported US oil storage levels and Iran oil exports

"Oil prices are on track to finish the week with the foot on the brake pedal as traders are hit with bearish news from all sides, the US, China and Iran.

The pandemic seems to continue to expand into a second wave in China, with infections rising by the day and reaching again different regions such as Shanghai.

A rise in Chinese infection numbers is of particular concern, not only because China is among the world’s largest oil consumers and the market that helped oil prices recover the most, but also as the Lunar New Year holiday period is approaching.

The holiday is traditionally a time of heavy road fuel consumption in China but the country is now introducing restrictions and is advising people to not travel, which will definitely be a slap to oil demand.

In the US, the API institute reported crude storage builds for last week, a surprise development for many, since shipments of oil have been reduced recently.

If these numbers get officially confirmed later today, it could be an indication that demand is indeed slowing down again due to the pandemic and that vaccination campaigns have a lot of way to cover before they manage to help demand further.

Refinery maintenance season is also coming soon so storage levels will be under pressure and traders will be monitoring them closely.

Until recently, Iran’s oil production was out of the global trading monitor, but after today’s ministerial statement that exports have risen significantly, markets started to worry.

Iranian barrels are now seeing a window to reclaim some market share as a result of OPEC’s production cuts.

Despite sanctions, Chinese refiners have been importing crude volumes around 300 000 bpd from Iran, according to tanker tracking data, and could hike imports to feed the strong growth expected in Chinese crude runs in 2021.

If US sanctions are removed from Iran, we find that Iran has the capacity to bring 1.6 million bpd online within 6-8 months of eased sanctions, on excess of its current estimated production.

A return of Iranian oil may also be warmly welcomed in a post-pandemic world, but for now it could just add tightness to a market that is striving to balance demand.

On the supply side we are seeing sizeable volumes come offline not because of Covid-19 or price pressure, but other technical issues. This month, we revise down Brazil crude and condensate production by 200 000 bpd on account of maintenance, primarily at Lula.

In Kazakhstan, January 2021 crude and condensate production is forecast at 1.7 million bpd, more than 180,000 bpd below normal levels, which we expect to snap back by February 2021.

Maintenance at various projects in Libya will take 100 000 bpd of Es Sider crude blend off the market in January 2021. Libya faces yet another supply-side risk over reports of traders are rejecting cargoes due to high levels of mercury – which can damage refinery units – for the Amna, Abu Attifel and Zueitina blends.

Together, these blends make up about 10% of total Libyan oil production, so a disruption of exports, or worse, a deeper underlying issue of damaged infrastructure, would pose a downside risk to our Libya profile.

On the demand side, the cocktail is sour, with expanding lockdowns rapidly growing in Asia and Europe. More than 55% of Japan’s population is under a state-of-emergency lockdown through 7 February 2021, and China’s Hebei province remains in lockdown.

Most major European cities are living under strict quarantines and curfews, and there are talks of third and fourth iterations of confinements.

Rystad Energy estimates that Europe’s jet fuel demand in the first three weeks of January 2021 averaged about 550 000 bpd, which is still 60% lower than January 2020 levels of 1.4 million bpd.

By total damage, road fuels in Europe are being hit harder: Instead of the 6.5 million bpd of diesel and gasoline demand in Europe in January 2020, demand has shrunk to 5.3 million bpd in January 2021, or about an 18% decrease as strict lockdowns keep people stationary.

The new wave of lockdowns is a wake-up call that vaccines are not an immediate antidote to sluggish oil demand."

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