Oil Bulls Are Taking Profits On Second Wave Fears

Covid-19 concerns again are weighing on energy market sentiment
EIA report shows 529,00 BPD leap in gasoline demand
Ethanol traders look at sugar
Energy Report

Energy Report


The Phil Flynn Energy Report 

Coronavirus 2

Just when you thought it was safe to go back in the water, Covid-19 concerns again are weighing on market sentiment and hurting prices for oil and products. Spikes in new reported cases and a spike in crude oil supply sank an oil market that had been riding a wave of economic recovery optimism inspired by the reopening of more parts of the global economy. Still, medical experts are telling us that this isn’t a second wave. Yet when you hear the numbers, it’s disturbing to traders that fear a sequel to the economic shutdown, thinking that the sequel is usually worse than the original.

The Wall Street Journal reports that, "Thirty-three states, from Oklahoma to South Carolina and Washington, had a 7-day average of new cases on Tuesday that was higher than their average during the past 2 weeks, according to a Journal analysis of Johns Hopkins University data. That was the situation in 21 states at the start of the month, so the data reflect recent increases in new cases.” The Journal says that, "The 7-day average of new cases nationwide has been growing faster than the 14-day average since June 13, after lagging behind it since late April. Comparing the 1- and 2-week averages of new cases helps smooth out anomalies in the data, such as states not reporting cases during a weekend. New York and nearby states such as New Jersey were early pandemic hot spots, but cases and deaths in those states continue to fall. Now, public health officials are expressing concern about rising case counts, the positive percentage of tests, and hospitalizations in Southern and Western states. The recent case increases have already started to delay some plans to reopen economies.”

Delaying those reopenings isn’t attractive for oil traders who have been counting on improving demand. The EIA' weekly petroleum report did show a big 529,00 barrel per day (BPD) leap in gasoline demand to 8.608 million BPD last week, almost getting back to pre-coronavirus levels. While not quite back to normal summertime levels, the improvement would have been encouraging if it weren’t for the potential to see a reversal of U.S. states delaying reopening their economies.

Crude supply increased by 1.4 million barrels, and Cushing, Oklahoma stocks fell by 1 million barrels and 2  million barrels made its way into the Strategic Petroleum Reserve. Crude demand rose by 900,000 barrels a day. U.S. oil production bounced back from the Tropical Storm Cristobal shutdowns to 11 million barrels of oil per day. Ultra-low sulfur diesel stocks increased 400,000 barrels as demand fell by 89,000 BPD.  

Ethanol traders look at sugar, believe it or not. Sugar is one of those commodities that have been red hot. It's not just milk, cheese, and gold. The Wall Street Journal writes that, "Sugar prices are poised for their best quarter in 4  years, driven by a recovery in oil markets and supply disruptions in the market for the sweetener. But traders say the rally may not last.  Sugar No. 11 futures have climbed almost 13% since the end of March to about 12 cents a pound Thursday. The surge, which follows a battering that sent the price to its lowest in over 12 years in April, puts the commodity on track for its best quarter since June 2016.

The Journal writes that the volatility this year in the sugar market has mirrored the turbulence in energy markets. That is because sugar crops can be processed into ethanol, a biofuel sometimes used to power engines. But increased sugar output from Brazil, the world's largest producer, and a potential drop in demand as coronavirus lockdowns, force people to cut back on dining out, or consuming soft drinks and sugary products at movie theaters and ballgames, threatens to push prices lower again.

With the risk mood being negative, oil bulls are taking profits. From a negative 4032 to a positive 4163! - it was an incredible run. While we still think oil can go higher, we may have to sell off and consolidate a bit. News that the U.S. may give China a 12-month extension on some goods purchases may provide us with a bounce.

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About the Author

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