23 January 2020 by jbchevrel
Crude has lost about 3% for the second day in a row, due to a mixture of things. Some may be concerned that China’s Wuhan corona virus may weigh on oil the demand side of the equation. For context, crude futures broke < $55 as China (world’s #1 oil importer) quarantined a major city (Wuhan, ~10m hab) to contain the corona virus, which many experts compared to the SARS that hit in the early 2000s. Oil sector is hit hard because people price in the potential hit to travel, especially airline traffic ahead of the Chinese Lunar New Year holidays (starting tomorrow in mainland China) which is effectively the biggest seasonal human migration in the world. Bloomberg reported that GS predicts, based on SARS experience, that the corona virus may crimp global demand by 260kb/d this year (jet fuel ~ 2/3 of it). On the supply side, however, we had an unexpected decline in U.S. crude inventories. The DoE reported a 405kb decrease in crude stockpiles last week, vs expectations for a build by analysts and industry-funded API. Gasoline stocks also increased by less than expected (1745kb vs 2978kb) while those for heating oil posted a unexpected decline. The EIA also reported a 1.75mb gain in gasoline stocks, the smallest gain since September 2019 and distillate stocks fell -1.2mb after gaining 20mb+ over the previous three weeks. So that helped the market recover slightly from its previous losses, but that was nowhere near enough to compensate for the losses caused by the corona virus. Adding to this argument on the supply side, are added the halt of exports from Libya and the suspension of Nigerian Bonny crude shipments. In CDS space, the under-performance of oil related names had started yesterday but it was even more remarkable today. In IG space we have APA +14 DVN +11 ECACN +11 HES +11 OXY +10 CNQCN +7 VLO +6 COP +5 etc. thus ECACN is now #3 widest name in CDX IG s33 wider than KSS and JWN. Similarly APA is now wider than DXC. in HY space too, we have CHK wider by 7 points in two sessions. RIG and NBR were also underperforming. Finally, this was also reflected at the index levels, with CDX HY decompressing +2 vs IG while the decompression was +3 in fair value terms, for todays session alone.