Oil Market Needs to Focus on What Is, Not What If

Sunday night market overreaction
Iraq is improving compliance with OPEC production cuts
RBOB Gasoline futures look solid as demand is coming back
Energy Report

Energy Report

 

The Phil Flynn Energy Report 

Another Wave

Sunday night is always a good time for markets to overreact after a pause in global trading. A wave of selling oil and stocks on fears of a second wave of the coronavirus permeated the trade. The market is pricing in the odds of another lockdown of global economies, thereby taking away the oil demand gains that we have seen in recent weeks. China, ground zero for the start of Covid-19, accentuated those concerns. After nearly two months with no new infections, Beijing officials have reported 79 coronavirus cases over the past 4 days. We also saw increases in disease in parts of the U.S. and Japan as well. Is it too early to predict a massive second wave?


It's also too early to predict another shutdown of the global economy. Oil should focus on what seems to be a better outlook when it comes to a rebalancing of global oil supply.

We saw, for example, another increase in China's industrial output for the second month in a row in May. Chinese refinery runs also spiked by 8.2% to an impressive 13.6 million barrels a day (BPD).

We see better compliance with the most significant OPEC+ production cut in history, which increases the odds that the reduction will be extended until the end of the year. The cut that had reduced 10% of the global supply was in jeopardy due to some noncompliance. The biggest offender was Iraq, and both Russia and Saudi Arabia exerted pressure on the country to get their oil production under control. Reuters is reporting that's happening. They wrote, "Iraq has agreed with major oil companies operating its giant southern oilfields to cut crude production further in June, Iraqi officials working at the fields told Reuters on Sunday. Baghdad aims to improve its compliance with its output cut targets under a global deal with OPEC and its allies to reduce the oil supply. Iraq has agreed with Russia's Lukoil to start an additional cut of 50,000 barrels per day (bpd) as of June 13 to lower production from the West Qurna 2 field to around 275,000 bpd. Lukoil cut output by 70,000 bpd in May in response to a request by Iraq's oil ministry; two Iraqi oilfield managers told Reuters on Sunday. Production from West Qurna 2 was around 395,000 bpd in April, the managers said."

The Iraqi oil managers, who oversee production operations, said state-run Basra Oil Company had asked BP to cut production from the Rumaila oilfield by around 140,000 BPD of its total production, which stands at between 1.4 to 1.45 million BPD. Exxon Mobile Corp has also agreed to cut an additional 70,000 BPD from the West Qurna 1 field to reduce production to around 350,000 bpd in June, the two Iraqi managers said. Production was cut by about 50,000 bpd in May and stood at approximately 420,000 BPD. Lukoil, BP, and Exxon were not immediately available for comment. Iraq has told OPEC it would start an urgent plan to cut its oil production gradually to fully comply with its quota after the group demanded that Baghdad and other laggards adhere to a pact on output curbs.

BP is anxious about the future of oil demand. The Wall Street Journal reported that, "BP PLC is writing down up to $17.5 billion of its assets and might leave some of its oil and gas in the ground because of lower energy prices and weakened demand amid the global crisis caused by the novel coronavirus. The British energy giant sees the pandemic—which caused nationwide shutdowns and drove U.S. oil prices into negative territory—having a lasting economic impact, leading to fragile energy demand and sinking prices. The virus will also accelerate the world's shift to a lower-carbon economy, BP said, with governments directing some of their stimulus packages to climate-friendly initiatives. BP's shares were down 4% in early trading Monday. The company expects to report its second-quarter results on August 4, a week later than previously planned. 

Gas demand is coming back and so are gasoline prices. The A.P. reported that, "The average U.S. price of regular-grade gasoline rose 11 cents over the past 2 weeks, to $2.16 per gallon. Industry analyst Trilby Lundberg of the Lundberg Survey says Sunday that the jump came as crude oil costs increased. The highest average price in the nation for regular-grade gas is $3.11 per gallon in Honolulu. The lowest average is $1.69 in Baton Rouge, Louisiana. The average price of diesel is $2.55, the same as 2 weeks ago.


RBOB Gasoline futures look solid as demand is coming back. The second wave fears may pause us, but RBOB should have a great week. 

Don’t miss out on my wildly popular trade levels on all major markets as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.

 

About the Author

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