The Phil Flynn Energy Report
OPEC’s Joint Technical Committee is trying to thread the oil needle by increasing oil production but not crash the global oil market price. While some fear that any production increase in global output will end the most significant oil price recovery on record, the reality is data shows that very soon, the world is going to need more oil. I know that comes as a surprise to many that thought that the global glut created by the Covid-19 economic shutdown was going to keep us oversupplied forever. Yet low oil prices have done what low oil prices always do; they create demand growth and force lower production. We have seen global oil production fall dramatically because of the OPEC+ cuts but because of forced shut-ins and a major drop in U.S. oil production.
OPEC's own data shows that the demand for its crude will surge by 25% in 2021 to an average 29.8 million barrel per day (BPD). This estimate will eclipse the demand level we saw in a pre-coronavirus world in 2019. So even with some OPEC members cheating on production cuts, their mission to reduce oversupply has been very successful. Even the cheaters in the cartel may be a reason the OPEC can 'raise production' but finesse it is such a way that it won't kill prices.
Nigeria, Kazakhstan, and Iraq have been the cartel members that let us say, didn’t live up to their commitments. So while compliant members of the OPEC cartel raise production by 2 million BPD in August, it actually will be 842,000 BPD less because of pledged compensatory oil cuts by the scofflaws in the cartel. That lowers the cuts to 8.542 million barrels a day down from a decrease of 9.6 million barrels a day.
The U.S. in the meantime is starting to feel the impact of falling OPEC output and lower U.S. production. The evidence is, in part, in yesterday's API report, which showed a monster 8.322 million barrel crude draw. The bulk of the draw was in the Gulf Coast, and supply in Cushing Oklahoma hub increased slightly by 548,000 barrels.
The report also suggested the v shape recovery in gasoline demand is on track with a reported 3.611 million-barrel drop in crude supply. The only bearish aspect of the story was a 3.030 million barrel increasing distillate supply as plans are still in many cases on the ground.
There is also more evidence of falling U.S. oil production. Chief executive of Parsley Energy Matt Gallagher told the Financial Times that peak production that the United States hit back in March—13.1 million BPD on average—represented shale's glory days, never to be repeated in his lifetime. Of course, in oil, you never say never, but U.S. shale does have issues, and they’re taking a toll.
Today we get the EIA’s weekly petroleum report, which I expect will be bullish. Look at gasoline demand and falling output. Low prices are curing low prices, my friend.
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