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Hedge funds sell oil as coronavirus stokes recession fear

February 12/2020

MOSCOW (MRC) -- Hedge funds were heavy sellers of petroleum last week for the third time in four weeks, amid mounting anxiety about the impact of a coronavirus outbreak on oil consumption in China, reported Reuters.

Hedge funds and other money managers sold the equivalent of 131 million barrels in the six most important futures and options contracts in the week ending Feb. 4.

Portfolio managers have sold a total of 367 million barrels since Jan. 7, reversing a large amount of the 533 million barrels bought during the previous 13 weeks.

Fears about a coronavirus-driven downturn in oil consumption have replaced earlier expectations about a cyclical recovery in oil demand growth.

Selling has been concentrated in crude and the middle distillates used heavily in manufacturing and transportation, including aviation and shipping, the sectors most exposed to Chinas economy and the coronavirus.

Hedge funds were heavy sellers last week of NYMEX and ICE WTI (-56 million barrels), Brent (-50 million), European gasoil (-18 million) and US heating oil (-8 million).

In response to the coronavirus, PetroChina has said that it will cut crude processing at its refineries by 320,000 barrels per day in February, around 10% of its average production rate, with even deeper cuts to come in March.

Chinas state-owned refiners have now signaled production cuts totaling more than 900,000 bpd this month (PetroChina to cut February crude runs by 320,000 bpd due to virus, Reuters, Feb. 10).

By contrast, fund managers made no net change in their position in US gasoline last week, which is more focused on the United States and private motorists.

The economic and oil market impact of the virus outbreak is similar to a severe recession centered on China, which is currently extremely deep but of uncertain duration, and where the full impact on other countries is unclear.

Normal recessions are driven by economic processes, including inventory adjustments, consumer and business confidence, and labor market dynamics.

Even in normal times, recessions have much in common with epidemics as narratives about a deteriorating business environment and increasing risk spread among households and businesses, causing them to reduce spending.

But the coronavirus-recession in China is additionally driven by the success of primary infection control in Hubei province; the probability of secondary outbreaks in the rest of China and worldwide; and decisions by governments, businesses and individuals about the optimal trade-off between the need for infection control and the need to keep normal commercial activities operating.

If the virus can be successfully contained while business activity is normalized, the coronavirus-induced recession could be very short, albeit severe, and localized mostly in China, though with impacts on the countrys supply chain.

Chinas government and businesses have started signalling a gradual normalization of commercial and transportation activities after a two-week long extended holiday intended to slow the rate of virus transmission.

However, if there are uncontained secondary outbreaks across the rest of China forcing an extended suspension of normal business activity, the recession could be much longer, with an inevitable worldwide effect.

And if the virus cannot be contained within China, governments and businesses will face an even more uncomfortable choice about how to manage the trade-off between risks to human health and the need to maintain semi-normal operations.

As MRC wrote previously, PetroChina's subsidiary refinery, Dalian Petrochemical Corp, plans to have a major turnaround in April-May of 2020, four industry sources told Reuters in January 2020. The maintenance is scheduled to start from late March or early April and will last for around one and a half months, the sources said. The 410,000 barrels-per-day (bpd) plant in the northeast Chinese port city of Dalian, PetroChina's biggest refinery, is linked to Russia's East Siberia Pacific Ocean (ESPO) pipeline and is China's largest processor of the pipeline ESPO blend crude.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 2,093,260 tonnes in 2019, up by 6% year on year. Shipments of all PE grades increased. PE shipments rose from both domestic producers and foreign suppliers. The estimated PP consumption in the Russian market was 1,260,400 tonnes in January-December 2019, up by 4% year on year. Supply of almost all grades of propylene polymers increased, except for statistical copolymers of propylene (PP random copolymers).


mrcplast.com
Author:Margaret Volkova
Tags:PP, PE, crude and gaz condensate, PP random copolymer, propylene, ethylene, petrochemistry, PetroChina, China, Russia, USA.
Category:General News
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