The Phil Flynn Energy Report
Wave It Out
Covid-19 fears overshadowed yesterday's very supportive EIA status report. Ten U.S. states saw a record number of new Covid-19 cases this week and a cluster of new infections in Beijing that caused them to close schools and canceled flights. The news had traders wondering about a potential new second wave of the Covid-19 virus. They feared that what had been an impressive comeback in global energy demand could be thwarted. Yet traders were torn, trying to balance the risk of a second wave versus the chances that the increase may not be a second wave but just a reflection of better testing.
In the Wall Street Journal Dr. Anthony Fauci said that, "People keep talking about a second wave. We're still in a first wave." It’s also unlikely that the global economy will shut down, so at some point, oil traders might focus on the fact that global demand is recovering exceptionally well, and global production is still falling. That trend, assuming we don’t take a big coronavirus to step back, means that we could see a very tight global oil market later this year, despite what OPEC says.
Reuters reports that OPEC warned in a monthly report the market would remain in surplus in the second half of 2020 even as demand improves, as it now expects supply from outside the group to be about 300,000 barrels per day (BPD) higher than previously thought.
Of course, I’m not buying it. I believe OPEC is talking about their book and trying to pressure OPEC cheaters to improve compliance, which they have. OPEC+ compliance with crude production cut commitments in May was 87%, 2 OPEC+ sources said on Wednesday. Private sources put that number higher, and Russia has complied with 100 percent of their cuts.
While the 1.22-million-barrel crude build was a bit higher than expected, a significant 2.608 million-barrel drop in Cushing, Oklahoma and a big drop in U.S. oil production was very supportive. Even though a big part of the production drop this week was tropical storm Cristobal related with a fall to 10.5 million BPD, the lowest level since 2018, was eye-opening. We also saw more oil stored in the Strategic Petroleum Reserve to the tune of 1.7 million barrels. Also, total demand on the U.S. petroleum system by 525,00 BPD was due in part to storm-related disruptions.
The reports showed another drop in gasoline supply, falling by 1.6 million barrels and also the first drop in distillate stocks in 11 weeks, falling by 1.2 million barrels last week. That reflects increasing jet fuel consumption as planes start to fly again. Refiners also focused less on the production of distillate as it dropped by 264,00 BPD and changed the focus to increasing gasoline demand.
While gasoline demand dipped slightly, it’s still just shy of 8 million barrels a day. Based on reports of traffic congestion in cities like Chicago coming back, it’s coming back faster than refiners had expected. The EIA showed U.S. crude oil refinery inputs averaged 13.6 million BPD, which was 116,000 BPD more than the previous week's average. Refineries operated at 73.8% of their operable capacity last week. Gasoline production increased last week, averaging 8.4 million BPD. Distillate fuel production decreased last week, averaging 4.5 million BPD.
This also means that the days of low gasoline prices will be ending. Refiners are starting to fall behind the demand curve.
The EIA reports today on natural gas and we are expecting an 85 billion cubic feet increase in supply. This market has gotten trounced on weak demand and excessive production. A weak global liquid natural gas market has hurt as well. Still, we look like we might be getting ready for a bounce. Look to try a catch a falling knife trade if you are brave and have money to spare. Of course, it would also help if you had steel gloves.
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