The Phil Flynn Energy Report
It's a Low Inflation World
If you think there’s any chance that the Federal Reserve is worried about inflation after gold hit the highest level since 2011, well you can forget about it. Despite the fact that one of the many personalities of gold is a hedge against inflation, its recent rise towards record highs isn’t raising alarm bells at the Federal Reserve as their focus is on jobs and the belief that inflation is a non-issue. Federal Reserve Bank of Richmond President Thomas Barkin is convinced it’s a “low inflation world.” So when a low inflation world collides with a Covid-19 world, you can be assured that our friends at the Fed will keep rates at zero forever and even plan more aggressive, unconventional strategies to prop up the economy and create the environment for more consumption. Is the time to start worrying about inflation when the Fed is not? I’m not sure but I still like gold.
The Feds’ low inflation world outlook is also creating a floor for oil. Fed actions, along with OPEC plus cuts that are going to reduce supply along with the historic drop in U.S. oil production, will set the stage for higher prices and better demand for oil. They slightly raised their forecast for production based on a forecast for a higher price.
The EIA reported they expect annual average U.S. crude oil production to fall in 2020 and 2021 and forecast WTI spot prices remain less than $50 per barrel through 2021. EIA forecasts that U.S. crude oil production will average 11.6 million barrels per day (BPD) in 2020 and 11.0 million BPD in 2021. These levels are 0.6 million BPD and 1.2 million BPD, respectively, lower than the 2019 average of 12.2 million BPD. EIA finalized this month’s forecast before a U.S. District Court ordered on July 6 the temporary closure of the Dakota Access Pipeline. The operators of the pipeline have announced they will file a motion to stay the decision.
EIA forecasts U.S. liquid fuels consumption will average 18.3 million BPD in 2020, down 2.1 million BPD from 2019. Declines in U.S. liquid fuels consumption vary across products. From 2019 to 2020, EIA expects jet fuel consumption to fall by 31% and gasoline and distillate fuel consumption to both fall by 10%. The declines reflect travel restrictions and reduced economic activity related to Covid-19 mitigation efforts. EIA expects the largest declines in U.S. liquid fuels consumption have already occurred and consumption will generally rise through the second half of 2020 and in 2021. EIA forecasts U.S. liquid fuels consumption will average 19.9 million b/d in 2021.
EIA expects U.S. dry natural gas production to average 89.2 billion cubic feet per day (Bcf/d) in 2020, down from 92.2 Bcf/d in 2019. This 3% decrease is the result of falling natural gas prices that caused a decline in drilling activity and production curtailments. EIA expects annual average dry natural gas production in the United States will decline by 6% in 2021 to 84.2 Bcf/d. However, EIA expects production to increase during the second half of 2021 as natural gas prices in the forecast rise.
EIA expects U.S. natural gas consumption will decline by 3% in 2020. The main driver of the decline is lower consumption in the industrial sector because of Covid-19 mitigation efforts and related reductions in economic activity. Forecast U.S. natural gas consumption declines by 5% in 2021 as a result of expected rising natural gas prices. The rising prices will reduce the use of natural gas in the electric power sector, which will more than offset increases in natural gas consumption in the industrial, commercial, and residential sectors.
The Henry Hub natural gas spot price averaged $1.63 per million British thermal units (MMBtu) in June, the lowest inflation-adjusted price going back to at least 1989, as a result of low demand. EIA expects falling production will put upward pressure on natural gas prices through the end of 2021. EIA forecasts that Henry Hub spot prices will average $1.93/MMBtu in 2020 and $3.10/MMBtu in 2021.
EIA forecasts working natural gas in storage will reach 4,039 billion cubic feet (Bcf) at the end of October, which would be the most U.S. natural gas in storage as of the end-of-October on record. This forecast level surpasses the previous end-of-October record of 4,013 Bcf reached in October 2016.
EIA expects the share of U.S. electric power sector generation from natural gas-fired power plants will increase from 37% in 2019 to 41% this year. In 2021, the forecast natural gas share will decline to 36% in response to higher natural gas prices. Coal’s forecast share of electricity generation falls from 24% in 2019 to 18% in 2020 and then increases to 21% in 2021. Electricity generation from renewable energy sources rises from 17% in 2019 to 20% in 2020 and to 22% in 2021. The increase in the share from renewables is the result of expected additions to wind and solar generating capacity. The forecast nuclear share of generation averages about 21% in 2020 and will be slightly less than 21% by 2021, which is consistent with upcoming reactor retirements.
The API reported that crude supplies increased by 2 million barrels but products fell. A drop of 1.8 million barrels in gasoline supply suggests that gas demand is starting to rise again and a drop in distillates, the second week in a row, is suggesting that freight volumes is and increasing flights reducing some distillate oversupply.
Seth Holmes of logistics data provider Freight Wave wrote that, "Volumes have continued to burst all around the country this week. Carriers are rejecting loads at rates only seen during the March panic-buying spree buildup. Spot rates have been bid up above 2019 levels in many markets around the country, but it is unlikely that this trend continues given there is typically a significant drop-off in outbound volume after the Fourth. However, volumes are so high currently that even a significant decline could still keep OTVI [outbound tender volume index] above 2018/2019 comparable."
Holmes says that it appears highly unlikely for volumes to continue in this range after the July 4 holiday. In each of the past 2 years, OTVI has averaged roughly 10,200. A major retraction in tender volumes would need to take place for the index to average similar levels as the previous two on the positive side, 9 of the 15 of the major freight markets Freight Waves tracks were positive on a week-over-week basis. This ratio has been consistently high in recent weeks. The markets with the largest gains this week in OTVI-USA were Laredo, Texas (11.33%), Los Angeles (8.57%), and Dallas (6.93%). The markets with the largest declines this week in OTVI-USA were Cleveland (-10.68%), Memphis (-2.63%), and Indianapolis (-2.42%).
Natural gas is still higher as more heat is in the forecast. Mother nature is bailing out this beleaguered market.
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