The Phil Flynn Energy Report
Finding a Way
Oil producers are finding a way to store some oil and prices are still trying to comeback despite uncertainty about how quickly the U.S. can open up the economy. Stock prices fell after testimony from Dr. Anthony Fauci, who warned senators that if the country opened up too soon and did not adequately prepare, “then we run the risk of having a resurgence.” That fear of a second wave zapped optimism from stocks and slowed the oil rise as oil looks for signs of hope in a market that last month had the worst price drop in the history of the market. Oil had been on the rise on reports that OPEC and its conspirators like Russia are looking to extend their record-breaking 9.7 million barrel per day (BPD) production cuts beyond May and June instead of slowly increasing production. They’re expected to agree to that at the June 8 online OPEC+ meeting.
Crude oil prices are also trying to balance mixed signal from reporting agencies and supply reports. The API reported that there was a 2.3-million-barrel crude stock draw at the Cushing, Oklahoma, delivery hub. That draw significantly reduces the chance of another sub-zero oil price. The overall supply number still increased by 7.6 million barrels. So some good and some bad. The API also reported another draw in gasoline stocks that fell by 1.9 million barrels, showing that demand for gas is rising and is coming back fairly strong. Still a very large 4.712 increase in distillate supply suggests that refiners are focusing on building supplies for the sector where demand was less impacted by the coronavirus was misguided. The problem now for refiners is keeping pace with growing gasoline demand.
We get the EIA weekly report today. Yesterday, it was the EIA Short Term Energy Outlook (STEO) that grabbed attention. The EIA was the first reporting agency to give their views.
Today we get to hear from OPEC. Yesterday we heard some provocative comments from the International Energy Agency’s executive director Fatih Birol who told Bloomberg News that, "producers may need to do more to lift the oil market and trying wipe out shale oil is like playing Russian Roulette." He warned that, "It will take more than a year, and perhaps several, for oil demand to recover to what it was before the coronavirus shuttered economies and caused energy markets to collapse.”
The EIA for their part talked about a major drop in U.S. energy production. The EIA revised its current forecast of domestic crude oil production down from the April STEO as a result of lower crude oil prices. EIA forecasts U.S. crude oil production will average 11.7 million BPD in 2020, down 0.5 million BPD from 2019. In 2021, EIA expects U.S. crude oil production to decline further by 0.8 million BPD. If realized, the 2020 production decline would mark the first annual decline since 2016.
U.S. crude oil production hasn’t declined for 2 years in a row since the 17-year period of declines beginning in 1992 and running through 2008. Typically, price changes affect production after about a 6-month lag. However, current market conditions will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels.
The EIA estimates global petroleum and liquid fuels consumption averaged 94.1 million BPD in the first quarter of 2020, a decline of 5.8 million BPD from the same period in 2019. EIA expects global petroleum and liquid fuels demand will average 92.6 million BPD in 2020, a decrease of 8.1 million BPD from last year, before increasing by 7 million BPD in 2021. Lower global oil demand growth for 2020 in the May STEO reflects growing evidence of disruptions to global economic activity along with reduced expected travel globally as a result of restrictions related to Covid-19.
EIA expects that global liquid fuels inventories will grow by an average of 2.6 million BPD in 2020 after falling by 0.2 million BPD in 2019. EIA expects inventory builds will be largest in the first half of 2020, rising at a rate of 6.6 million BPD in the first quarter and increasing to builds of 11.5 million BPD in the second quarter as a result of widespread travel limitations and sharp reductions in economic activity. Firmer demand growth as the global economy begins to recover and slower supply growth will contribute to global oil inventory draws beginning in the third quarter of 2020. EIA expects global liquid fuels inventories will fall by 1.9 million BPD in 2021.
For natural gas the EIA predicts a pull back in production as well. U.S. dry natural gas production set a record in 2019, averaging 92.2 billion cubic feet per day (Bcf/d). EIA forecasts dry natural gas production will average 89.8 Bcf/d in 2020, with monthly production falling from an estimated 93.1 Bcf/d in April to 85.4 Bcf/d in December. Natural gas production declines the most in the Appalachian region and Permian region. In the Appalachian region, low natural gas prices are discouraging producers from engaging in natural gas-directed drilling, and in the Permian region, low oil prices reduce associated gas output from oil-directed wells. In 2021, forecast dry natural gas production averages 84.9 Bcf/d, rising in the second half of 2021 in response to higher prices.
EIA estimates that total U.S. working natural gas in storage ended April at 2.3 trillion cubic feet (Tcf), 20% more than the 5-year (2015–19) average. In the forecast, inventories rise by 2.1 Tcf during the April through October injection season to reach almost 4.2 Tcf on October 31, which would be a record level.
As far as natural gas prices the EIA forecasts that natural gas prices will generally rise through the rest of 2020 as U.S. production declines. EIA forecasts that Henry Hub natural gas spot prices will average $2.14 per million British thermal units (MMBtu) in 2020 and then increase in 2021, reaching an annual average of $2.89/MMBtu. EIA expects prices to rise largely because of lower natural gas production compared with 2020.
Today we’re watching Cushing. If they confirm a draw, June crude could soar. Those betting on subzero oil will have to cover. Outside markets need to stay strong but the recent recovery is looking more sold as the demand numbers are getting better. Look at gas demand and production as that may drive the complex.
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