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Crude falls as COVID-19 concerns take center stage after outbreak in China

January 18/2021

MOSCOW (MRC) -- Crude oil futures tumbled during the mid-morning trade in Asia Jan. 18, as rising coronavirus cases in China raised fresh demand-side concerns, while the spread of mutated strains of the virus also weighed down sentiment in the market, reported S&P Global.

At 11:10 am Singapore time (0310 GMT), the ICE Brent March contract was down 45 cents/b (0.82%) from the Jan. 15 settle to USD54.65/b, while the February NYMEX light sweet crude contract was down 38 cents/b (0.73%) to $51.98/b. The Brent marker had fallen 1.59% in the week ended Jan. 15 to USD55.10/b, whereas the NYMEX light sweet crude marker had ticked up 0.23% to USD52.36/b.

The fall in oil futures comes as a jump in coronavirus cases in China threatened to derail crude's demand recovery.

Towards the end of the week to Jan. 16, several Chinese cities were placed under lockdown to curb the spread of the virus. Even though the lockdown is due to be lifted by Jan. 19, fears of further restrictions remain heightened after the country reported over a hundred COVID-19 infections during each day of the weekend, according to media reports.

"We are seeing a continuation of the downward momentum from last week. Oil's rally stalled in second half of last week after the market started to emerge from under the spell of the surprise Saudi production cut, and started paying attention to the worsening pandemic situation in the western hemisphere and the worrying outbreaks in China," Vandana Hari, CEO of Vanda Insights, told S&P Global Platts on Jan. 18.

Hari further added that, against the backdrop of the fresh outbreaks, the market took little solace from the reasonably strong Chinese economic growth data, which may have instead drawn more attention to China's current struggle with the pandemic.

"It is not just the outbreaks in China that have rattled the markets, it is also the spread of three different and more contagious coronavirus strains reported in the UK, South Africa and Brazil," Hari said.

Despite the escalation of the pandemic, analysts retained a largely bullish outlook in the medium-term, noting that oil remains supported by the 1 million b/d cuts from Saudi Arabia, the vaccine roll-outs and hopes of further stimulus in the US.

"Despite the pullback in prices last week, the market remains supported by Saudi Arabia's output cut. Assuming demand growth remains stable, this should see the drawdown on global inventories rise to 1.1mb/d in Q1," said ANZ analysts in a Jan. 18 note.

Hari agreed, saying: "Majority of the premium from the Saudi cuts remains intact as 1 million b/d over two months is a substantial reduction in supply. However with the resurgent pandemic, it remains a two step forward, one step back situation for now."

As MRC informed previously, oil producers face an unprecedented challenge to balance supply and demand as factors including the pace and response to COVID-19 vaccines cloud the outlook, according to an official with International Energy Agency's (IEA) statement.

We remind that the COVID-19 outbreak has led to an unprecedented decline in demand affecting all sections of the Russian economy, which has impacted the demand for petrochemicals in the short-term. However, the pandemic triggered an increase in the demand for polymers in food packaging, and cleaning and hygiene products, according to GlobalData, a leading data and analytics company. With Russian petrochemical companies having the advantage of access to low-cost feedstock, and proximity to demand-rich Asian (primarily China) and European markets for the supply of petrochemical products, these companies appear to be well-positioned to derive full benefits from an improving market environment and global economy post-COVID-19, says GlobalData.

We also remind that in December 2020, Sibur, Gazprom Neft, and Uzbekneftegaz agreed to cooperate on potential investments in Uzbekistan including a major expansion of Uzbekneftegazs existing Shurtan Gas Chemical Complex (SGCC) and the proposed construction of a new gas chemicals facility. The signed cooperation agreement for the projects includes the creation of a gas chemical complex using methanol-to-olefins (MTO) technology, and the expansion of the production capacity of the Shurtan Gas Chemical Complex.

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

According to MRC's DataScope report, PE imports to Russia decreased in January-November 2020 by 17% year on year and reached 569,900 tonnes. High density polyethylene (HDPE) accounted for the greatest reduction in imports. At the same time, PP imports into Russia increased by 21% year on year to about 202,000 tonnes in the first eleven months of 2020. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.
Author:Margaret Volkova
Tags:Asia, PP, PE, crude and gaz condensate, homopolymer PP, propylene, HDPE, ethylene, petrochemistry, Gazprom neft, Shurtans Gas-Chemical Plant, China, Russia, USA, Uzbekistan.
Category:General News
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