The Phil Flynn Energy Report
While U.S. banks passed their stress tests, oil traders may not. Marked demand improvements around the globe, along with a big leap in U.S. durable goods orders and weekly jobless claims holding steady helped increase oil prices, record cases of Covid-19 are still tempering oil market enthusiasm. Reports that Russia is raising rates and clears signs that global demand is on an upward track, the virus spikes are making it hard to keep the market going. Russia is raising oil prices and cutting exports in a sign that the OPEC+ deal is going to continue, but will it matter if the demand for oil starts to contract.
The world is cautious. The Federal Reserve is telling banks to be careful and that is weighing on bank stocks. The Fed ordered the country's 33 largest banks to suspend their stock buyback programs and limit dividend payments to shareholders through September. The banks must also submit new plans for maintaining enough of the capital needed to survive a downturn. A Fed analysis of the banks' finances showed that they are in good shape now but that some could struggle in the worst-case scenarios of the economic recovery. "The banking system remains well-capitalized under even the harshest of these downside scenarios — which are very harsh indeed," Fed Vice Chair Randal Quarles said in a statement.
This caution is weighing on market sentiment and offsets all the good news about faster than expected oil demand recovery. Reuters reports that, "Road traffic in some of the world's major cities in June had returned to 2019 levels, data provided to Reuters by location technology company TomTom showed. But a resurgence of the virus in some places prompted drivers to stay home. Congestion in Shanghai in the past few weeks was higher than in the same period last year. But in Beijing, mobility dropped again in June as China's capital took steps to halt a new outbreak of the coronavirus. Traffic in London and New York rose steadily in recent weeks although it remained well below pre-Covid-19 levels, TomTom data showed, while in Moscow it was back at last year's levels.”
U.S. gasoline consumption in the second week of April was half the level a year earlier, according to Oil Price Information Service, which tracks weekly same-store gasoline volumes at 15,000 fuel stations, while June demand was down just 22%. Gasoline supplied, a proxy for demand, rose 9% in the week to June 19 but overall, in the past 4 weeks, fuel demand was down 17% from the same time a year ago, according to data released by the EIA. A resurgence of coronavirus cases held consumption in check.
Reuters is reporting that, "After U.S. crude futures took a historic plunge into negative territory in April, the two top oil price reporting agencies said on Thursday they would start new benchmarks reflecting the price of Gulf Coast-traded crude on tankers, a break from the old landlocked system. The two agencies are battling for supremacy to price more than 3 million barrels of oil shipped to global markets every day from the U.S. Gulf Coast. Currently, those barrels are underpinned by the U.S. benchmark WTI, reflecting crude delivered at Cushing, Oklahoma, some 500 miles (800 km) away.”
Both S&P Global Platts and Argus Media will launch Gulf Coast assessments on June 26 to reflect light, sweet oil loaded for shipment from there. Currently, crude grades traded from the Gulf reflect prices for oil at storage terminals and are quoted as a premium or discount to WTI, rather than as an outright price. Cushing, which markets itself as the pipeline crossroads of the world, has waned in importance as shale production has boomed in Texas over the past decade, and since Washington lifted a ban on U.S. crude exports in late 2015 according to Reuters.
What is a dead cat splat? Well, the natural gas market can do it to you! NYMEX prompt-month Henry Hub Natural Gas futures prices plunged to a 25-year low on June 25 as rising gas storage inventories and pandemic-related demand weakness continue to weigh on the market. In early trading, the NYMEX contract dipped 11.5 cents to around $1.48 per one million British thermal units (MMBtu) after the EIA reported a massive 120 billion cubic feet injection to gas storage – the largest one-week addition to stocks in nearly 14 months, EIA data shows. At market close, the NYMEX July contract settled at $1.482/MMBtu, according to S&P Global Platts data.
Oil is still in a recovery mode. I still think oil is on track for $50 a barrel later this year. Look for some consolidation before the next leg. If we see the Covid-19 upticks level off, the oil market could test $65, but that is still a big if.
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 firstname.lastname@example.org.