Second Wave Fears Won't Crush Oil Demand

The oil market faced its greatest fear, a second wave of Covid-19
Oil demand and car sales are up in China
Crack down on those who try to help Venezuela skirt oil sanctions
Energy Report

Energy Report


The Phil Flynn Energy Report 

Wave Rider 

The oil market faced its greatest fear, a second wave of Covid-19. The second wave fears crushed the stock market beyond reason or common sense, but now it looks like we are on the road to recovery. At least in the stock and oil market. Fears that a spike in cases of coronavirus led to worries that we would have to shut down the economy once again. Yet those fears aren’t based on science and could be a byproduct of more testing. The Trump administration is vowing not to shut down the economy again, even if a second wave occurs. Will these fears kill the oil demand trend that we are starting to see? I think not.

Looking at China, where the virus began, oil has been stellar and rising.  Bloomberg News reported that "Chinese consumption was already back at similar levels to a year earlier in mid-May after the country was largely shut down in February. While other nations are generally a couple of months behind China in terms of the impact of the pandemic, fuel consumption isn't snapping back as fast. Japanese gasoline demand was still down 27% in May from a year earlier, while South Korean processors are operating at rates that are 5 to 10 percentage points lower than usual. Indian diesel sales were nearly a third lower last month on a year-on-year basis. The drastic steps taken by China to contain the virus, which allowed its economy to bounce back faster, are one reason for the disparities."

In China's car sales are also coming back. Auto sales in May were +7% above the same month a year earlier, the first year-on-year growth since June 2018. GM and Ford are benefiting, and Goldman Sachs raised GM to a buy, not to mention an increase in Chinese gasoline demand will follow. 

The oil market recovery will be a bit more volatile, and we expect more long term gains. U.S. imports of oil will be high for 2 more weeks but then should reverse sharply. We are going to see more large draws in the Cushing Oklahoma delivery point, and we will see the market start to tighten in the fourth quarter of the year. 

Bureau of Safety and Environmental Enforcement (BSEE) Hurricane Response Team reported that it continues to monitor offshore oil and gas operators in the Gulf as operators resume normal operations following Tropical Storm Cristobal. Based on data from offshore operator reports submitted yesterday, personnel remains evacuated from a total of 20 production platforms, 3.11 percent of the 643 manned platforms in the Gulf of Mexico.

BSEE estimates that approximately 13.12 percent of the current oil production in the Gulf of Mexico remains shut-in. BSEE determines that roughly 8.89 percent of the natural gas production in the Gulf of Mexico is shut-in.

Venezuela has seen its oil production fall to an embarrassing low 645.700 barrels of oil a day, according to Baker Hughes.  The corruption of the illegitimate President Maduro has crushed the country’s economy and has hijacked the rights and future of its citizens. In fact, in the country with the largest proven oil reserves on the planet, its economy and oil industry has collapsed and now only has one oil rig in the entire region. The crash in the price of oil is crushing the Venezuelan oil industry that was already in sharp decline because of inevitable socialism that leads to corruption. Now it looks like the U.S. is cracking down on those who try to help Venezuela skirt sanctions.

Platts is reporting that global tanker market is growing anxious as the U.S. is considering imposing additional sanctions on oil tankers that have recently loaded oil from Venezuela, as it seeks to put a stranglehold on the Latin American country's oil revenues. Several shipping sources said the U.S. government is looking to penalize over 50 tankers that have either loaded from Venezuela or have carried Venezuelan oil via ship-to-ship transfers. If these sanctions did come into effect, it could affect a large proportion of the crude oil tonnage, leading to a surge in freight rates, sources said. This has already prompted some charterers, especially those in the U.S., Brazil, and even in China to avoid ships that recently visited Venezuela. "We are getting lots of charterers asking us to avoid ships that called ex-Venezuela," a ship broker said

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About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.