The Phil Flynn Energy Report
Telling a Different Story
While Federal Reserve Chairman Jerome Powell broke markets yesterday warning about the possibility of a prolonged recession, the oil numbers are telling a different story. Not only has gasoline demand risen back above 7 million barrels a day (BD), the IEA is saying that oil demand is coming back faster than expected from its historic losses.
The typically negative IEA seemed stunned that demand for oil is coming back as the world is seeing the most significant global oil production pullback in history. The Wall Street Journal quoted Fatih Birol, the IEA’s executive director, as saying that “We see early signs of a gradual rebalancing of oil markets. It is still gradual, and it is still fragile.”
The IEA said that “Better than expected mobility in OECD countries and the gradual easing of lockdown measures led to an upward adjustment of 3.2 BPD to our global 2Q20 demand number, but it is still sharply down on last year by 19.9 million BPD. Although 2H20 will be slightly weaker than previously forecast, our outlook for 2020 as a whole shows a demand fall of 8.6 million BPD, 0.7 million BPD more than in our previous Report. A resurgence of Covid-19 is a major risk factor for demand."
They also say that “Global oil supply is set to fall by a spectacular 12 million BPD in May to a 9-year low of 88 million BPD, as the OPEC+ agreement takes effect and production declines elsewhere. For some OPEC countries, e.g. Saudi Arabia, Kuwait and the UAE, lower May production is from record highs in April. Led by the United States and Canada, April supplies from countries outside of the deal were already 3 million BPD lower than at the start of the year."
OECD data for March show that industry stocks rose by 68.2 million barrels to 2,961 million barrels. Total OECD stocks stood 46.7 million barrels above the 5-year average and, due to the weak outlook, now provide an incredible 90 days of forward demand coverage. Preliminary data show that U.S. crude stocks built by 53.7 million barrels in April and crude inventories in Europe and Japan also rose by 3.1 million barrels and 3 million barrels, respectively. In April, floating storage of crude oil increased by 9.9 million barrels to 123.8 million barrels.
The EIA weekly report also showed better than expected demand as well as more oil going into the Strategic Petroleum Reserve (SPR). They saw another drop in U.S. production, but most importantly, a 3 million barrel drop in the Cushing, Oklahoma, storage hub. Some of that oil ended up in the SPR, which saw supply increase by 1.9 million barrels. While the storage hub is 80% full, some were predicting that this was the week that it would be full. The draw reduces the chances greatly for subzero pricing, but those concerns persist.
Reuters writes that the “Front-month June futures contract (CLM0) still has 138 million barrels due for delivery, with 4 trading sessions before expiry. Nearly 17 million positions were closed out yesterday. But the liquidation rate will have to accelerate significantly soon to avoid a repeat of the volatility that marked the previous expiry." Yet this time, Kemp says that it’s the WTI futures short-sellers are the ones under pressure as June contract heads towards expiry, with prices climbing and trading towards the top of the range since the contract became the front month. Opposite from the expiry of the May WTI futures contract when it was longs under pressure. So is it possible that instead of a price break on oil, we could see a short squeeze going into expiration? Stay tuned!
It was surprising to see RBOB Gasoline futures fall as U.S. gasoline demand, and U.S. gas production are almost even. Gas production is at 7.5 million BPD. Add some exports and imports, and the RBOB gas market could get really tight really quickly. After a decent run, the market allowed the negative comments from Jerome Powell about the downside risks to the economy, and Dr. Anthony Fauci’ s potential upside risks on Covid-19, to have them take profits. Yet today comments from the IEA on oil market balance along with an expectation that OPEC+ will extend production cuts beyond the next OPEC meeting in June are giving bulls the edge.
That, along with supportive data from the EIA that showed U.S. commercial crude oil inventories actually fell by 700,000 barrels, and total commercial stocks fell as well by 500,000 barrels, Gasoline fell by 3.5 million barrel, and distillates increased by 3.5 million barrels.
The EIA also shows that U.S. production fell to 11.6 million BPD.
So if you don’t know who to believe about the pace of the economic recovery, just look to the gas and oil demand numbers because they are probably your best gauge in a world of uncertainty. At the same time, don’t bet against the U.S. as we will come out of this more robust than ever. Hopefully, based on the demand numbers, that will be sooner rather than later.
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