The Phil Flynn Energy Report 11-4-2019
All Is Right
All of a sudden it seems all is right with the oil world. A much stronger than expected jobs number set off a rally that continues into today. Oil prices are popping on China's trade optimism, strong spot market demand and signs that U.S. shale producers are packing it in. The Baker Hughes rig count on Friday added another leg higher to oil and products as they reported yet another big drop in U.S. rigs.
The U.S. rig count has declined for its third consecutive week and ten weeks out of the last eleven. We saw a drop of five oil rigs and three gas rigs for a net loss of eight rigs, according to weekly data from Baker Hughes Co. There are now 822 active rigs, down 245 from the count of 1,067 one year ago, the lowest since 2017. The continued retreat from shale means U.S. production will eventually pull back.
The oil market also got support from a strong job market explaining why U.S. oil demand is running near records. Dow Jones reported that "Nonfarm payrolls rose by 128,000 in October, exceeding the estimate of 75,000 from economists surveyed by Dow Jones. There were big revisions of past numbers as well. August’s initial 168,000 payrolls addition was revised up to 219,000, while September’s jumped from 136,000 to 180,000. The unemployment rate ticked slightly higher to 3.6% from 3.5%, still near the lowest in 50 years. The pace of average hourly earnings picked up a bit, rising 0.1% to a year-over-year 3% gain.”
Trade war hope also is driving us. Oil shot higher after Bloomberg reported that, "Commerce Secretary Wilbur Ross expressed optimism the U.S. would reach a “Phase One” trade deal with China this month and said licenses would be coming “very shortly” for American companies to sell components to Huawei Technologies Co.”
Oil products are also strong. As I have been saying, it is time to get hedged if you are not already. Despite all of the talk of slowing demand, the truth is, the product market is tighter than it has been in years.
Did you miss fall? It was Thursday from about noon to three. Now winter has set in and according to BAMWX meteorologist Bret Walts, the forecast for cold is likely going to rival some of the coldest Novembers of the past 30 years through the first half of this month. Bret says that “After a few days of big swings in model data, the past 24 hours have seen major cold trends sending heating demand forecasts 50+ points above the 10/30-year normal values for the week 2 period. The West Pacific Ocean looks to become more favorable for typhoon activity over the next 7-10 days and we now see the potential of another recurving typhoon later this week. Typhoon Haling is expected to intensify over the coming days. Haling looks to directly impact the jet stream and send arctic air into the Central and Eastern US early in week 2. The question moving forward is certainly not if it is going to get cold, but how cold it is going to get.” I am not sure I really want to know.
The geopolitical poisoning for future fuels is hot and heavy. Oil Price reports that “Denmark granted Gazprom approval for its Nord Stream 2 gas pipeline project, a project that is set to bring 55 billion cubic meters of Russian gas into Europe annually. It is one of the most controversial pipeline projects in the world and is now moving ahead despite strong opposition from multiple EU members and the United States." They say that “The geopolitical tensions surrounding the development of Nord Stream 2 are unprecedented. To begin with, Russia has very poor relations with the Baltic states and Poland, nations who will almost always fight against anything they see as empowering Russia geopolitically. Then there is Ukraine, a nation that is strongly against the pipeline due to its fear of losing the transit fees that it currently charges Russia for exporting gas to Europe. Finally, and perhaps most importantly, the United States sees this pipeline as a direct threat to its soft power in Europe as well as a threat to its growing LNG exports."
But for all the politics and attention that this pipeline is attracting, the simple truth of the matter is that Europe, and more specifically Germany, needs this natural gas. Germany plans to shut down all its nuclear reactors by 2022. Many have questioned the wisdom—and some even the sanity—of that decision, but it remains government policy. The generation capacity that is being lost in that sector will need to be replaced, in the short term at least, by natural gas.
Despite its green reputation, Germany is a country that generates a surprisingly large portion of its total energy from coal. Its total installed coal-fired capacity is close to its solar capacity, at 44.9 GW, versus 47.9 GW for solar. At today’s growth rates, it’s current solar and wind capacity will not be enough to replace the retired nuclear plants. The only other option, which would be boosting the share of coal in the country's energy mix, is a political non-starter in Germany. Natural gas is, therefore, the only viable replacement and Germany is fully aware that its gas consumption is set to soar in the coming years.
Now, this gas doesn’t have to come from Russia, of course. It could come from the United States in LNG tankers. In fact, the European Union as a whole earlier this year promised President Trump to double its imports of U.S. LNG over the next five years. But they didn’t make the promise voluntarily. It came in response to a threat from Trump to slap import tariffs on European cars.
One may wonder why the EU, for all its anti-Russian rhetoric and sanctions, and legislative amendments aimed at curbing Gazprom’s role on the European gas market, would need the incentive of a tariff threat to diversify away from Russian gas. The answer is, again, simple. It’s the price! A must-read at Oil Price.
The key for LNG is transactions and clearing.