The Phil Flynn Energy Report
Oil prices took a hit overnight on fears of a second wave of Covid-19. Reports of a jump in cases in Florida, Texas, and Arizona and a sharp 5.7 million barrels increase in crude supply to a record overshadowed signs of rebounding U.S. oil demand. U.S. gasoline demand came in just shy of 8 million barrels a day up almost 3 million barrels a day from the coronavirus trough. We also saw a jump in refinery runs, up to 73.1% of capacity. Still, if the increase in coronavirus cases becomes a second wave, then a potential reversal in the demand gains could be had. Airline and retail stocks are taking a hit, pointing to a potential drop in oil demand. There are reports that Beijing’s 55 days run without a coronavirus came to an end as a man tested positive.
Oil prices did come back after the Federal Reserve announcement and Jerome Powell press conference. The commitment not to raise interest rates until 2020 overshadowed his continuing concerns about a second wave of the coronavirus. Now that looks like it could happen. Or maybe it's just a short term blip. The answer could determine the direction of stocks and oil.
Natural gas is trying to hold up also as demand is weak. The EIA is reporting that it expects U.S. electricity demand to total 998 billion kilowatt-hours this summer (June through August), the lowest level of summer electricity consumption in the United States since 2009 and 5% less than last summer.
EIA expects electricity consumption to be lower this year, mainly as a result of efforts to reduce the spread of Covid-19. Most of the anticipated decline in retail electricity sales occurs in the commercial and industrial sectors, which EIA forecasts to be 12% and 9% less, respectively, than during summer 2019. EIA expects residential electricity sales to grow by 3% this summer because more people are working from home and following social distancing practices.
Usually, the weather is one of the primary factors in determining electricity demand in the residential and commercial sectors. The National Oceanic and Atmospheric Administration (NOAA) forecasts that U.S. cooling degree days—an indicator of demand for air conditioning—for June, July, and August 2020 will be 1% lower than last summer.
This summer, however, other factors are affecting electricity demand more than temperature. Although state and local governments are relaxing stay-at-home orders, social distancing guidelines will likely result in Americans spending more time at home than usual this summer. Also, many people that had worked in offices are now working from home, shifting electricity demand from the commercial sector to the residential area. Macroeconomic indicators are primary drivers in EIA forecasts for electricity consumption in the commercial and industrial sectors. EIA’s short-term economic assumptions are based on IHS Markit's macroeconomic model.
This model projects nonfarm employment will fall by 13% in 2020 and that the electricity-weighted industrial production index will contract by 12% in 2020. The amount of electricity generation from coal will likely be lower than last summer as a result of less electricity demand. EIA forecasts coal-fired power plants will generate 178 billion kilowatt-hours (kWh) between June and August 2020, down from 272 billion kWh last summer. Coal continues its downward trend in its contribution to U.S. power generation, and EIA expects its generation share will fall from 24% of the electricity generated during summer 2019 to 17% this summer. EIA forecasts the amount of coal generation to be lower than a nuclear generation this summer (207 billion kWh).
EIA expects that natural gas-fired power plants will generate 467 billion kWh this summer, slightly higher than natural gas generation last summer (460 billion kWh). Forecast natural gas prices remain low this summer, making it relatively more economical than coal for power generation. EIA forecasts natural gas’s share of electricity generation to increase from 41% last summer to 44% this summer.
EIA also expects the renewable energy share of electricity generation this summer will increase compared with last summer. Significant additions of new wind and solar generating capacity, especially in the Midwest region and Texas, drive EIA’s forecast that U.S. wind’s share of electricity generation will grow to 7% this summer and utility-scale solar will increase to 3%.
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