The Phil Flynn Energy Report
The Race for A Cure
The race for a Covid-19 cure sent stocks off to the races. Crude oil had a massive rally on reports that Gilead Sciences had a successful phase 3 trial of Remdesivir, a Covid-19 drug, and there are signs that oil demand destruction has bottomed out. The EIA reported a smaller than expected build in crude and a draw in gasoline and reported that the Strategic Petroleum Reserve added over 1.0 million barrels to the reserve. They also reported a drop in U.S. oil production on the eve of the biggest coordinated global oil production cut ever.
The crude oil market has seen a big momentum change as the possibility of a treatment for Covid-19 means that the global economy can soon re-open and get back to normal. With the Fed telling us that they will use all the tools available to support a recovery and is in no hurry to raise rates, also helped to risk on in oil.
Yet it was gasoline that led the way. Gasoline demand increased by 670,000 barrels a day. While that doesn't sound like a lot, it was the biggest increase since May 2019. That number will continue to rise and with refiners still in cut back mode, we should see retail prices start to rise. Overall the EIA reported that total motor gasoline inventories decreased by 3.7 million barrels last week and are about 10% above the 5-year average. Gasoline production increased last week, averaging 6.7 million barrels per day. Demand on the 4-week moving average still is down by 43.7% from the same period last year.
China oil demand should rise as they reopen as well. Oil is also getting support because of expected OPEC+ cuts. While OPEC members weren’t in a hurry to cut production, the truth is that with the world watching, compliance to cuts should be good. Reuters is reporting that African oil producers Nigeria and Angola have revised down their crude oil export programs for May and June to align themselves with a global production cut deal led by OPEC. The Saudis are expected to over comply and Russia is already taking steps to cut back production.
Still the U.S. has a lot of supply to get through. The EIA reported that U.S. commercial crude oil inventories increased by 9 million barrels from the previous week. At 527.6 million barrels, crude oil inventories are about 10% above the 5-year average for this time of year. Distillate fuel inventories increased by 5.1 million barrels last week and are about 4% above the 5-year average for this time of year.
Bloomberg News is reporting that, “The Trump administration may announce as soon as Thursday a plan to offer loans to the ailing oil industry possibly in exchange for a financial stake, according to two people familiar with the matter. Treasury Secretary Steven Mnuchin and Energy Secretary Dan Brouillette have already briefed President Donald Trump on a plan to provide financial aid to oil drillers beset by a historic crash in prices, the people said. Brouillette, during a conference call Tuesday with an industry group, said Mnuchin was leaning toward aid that includes 2 separate programs -- bridge loans and emergency lending authority through the U.S. Federal Reserve -- designed to help smaller and medium sized companies. “This is not going to be a bailout, Mnuchin told reporters in the White House Wednesday. He said teams at both the U.S. Treasury and the Energy departments are talking with people around the world and are considering “a lot of different strategies. Trump said an announcement would come shortly.
Production cuts in oil, either on purpose or by default, come at a time when demand probably has nowhere to go but up. That also seems to be the same with prices. Of course when you come from $40 a barrel, that’s probably a good bet. While we aren’t quite out of the woods, the odds of seeing negative pricing in the June WTI futures contract is less likely. Oil traders are finding more storage and we slowed inputs into Cushing. While we will see more volatility and we may pullback, looking at the history surrounding other oil price crashes shows that long term we have seen the lows and should start a long-term oil and product price recovery.
Natural gas is fighting a battle between wiring about over supply versus crashing U.S. natural gas production. Worries about declining production was winning before reports of European LNG tankers being turned away. We should see the production declines win out as the global economy is opening.
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