The Phil Flynn Energy Report
The Oil Case
Oil prices stutter as fears that the impressive global oil demand snap-back with a stall as the Covid-19 continues to challenge the global economy. In the U.S., confirmed cases of Covid-19 are now over 3.5 million and with growing. Concerns of a rollback in the reopening of the economy, the demand side of the market is in question. The week-over-week demand drop in gasoline left RBOB as the weak sister in the complex even as distillate demand surprised to the upside. Still, the fact that we see Improving compliance by OPEC+, as well as a commitment to keep production cuts in place until 2022, should give the oil price a floor. I still expect that oil will hit $50 before the end of the year. I think OPEC+ will be flexible in adjusting output and demand will not crash, even with the uptick in coronavirus cases.
Saudi energy minister Prince Abdulaziz Bin Salman said in an interview with Al-Arabiya that the Joint Ministerial Monitoring Committee would meet every month until the oil market sees a full recovery from the pandemic. "The deal will continue until April 2022, it's clearly mentioned in the agreement that a further meeting to be held in December (2021) to discuss the need of extending the deal until the end of 2022." He stressed the importance of compliance with agreed quotas from all members, adding that without compliance, countries that fulfilled their commitments may not agree to cut their production subsequently. The minister described the decision that the Kingdom had taken last March after the collapse of OPEC+ negotiations to extend the oil cuts as "tough but the right decision."
Prince Abdulaziz also talked about some technical differences with Russia that caused some market worries. The last time the Saudis and Russia disagreed, oil had the biggest crash in history. Oil price reports that global oil demand will recover significantly next month, climbing to be within 10% of the level that the world saw before the coronavirus pandemic, Russia Energy Minister Alexander Novak said on Thursday, according to Reuters. Demand, according to Novak, was off by 25% in April, compared to demand levels before the virus hit, causing significant lockdowns the world over, including the world's top oil consumers, China and the U.S.
He could be right. Reports show continued signs of improving demand in China and Japan. Reuters reports that "China's refined oil product consumption picked up in the second quarter as industry and transport demand improved after the peak of the coronavirus epidemic, according to the national energy bureau, but was still well below year-earlier levels. After falling about 19% in the first quarter compared with January-March 2019, the National Energy Administration (NEA) said on Friday, "In the second quarter, the contraction narrowed by 6 percentage points." The NEA did not provide a breakdown of consumption of refined oil products in a briefing in the capital disclosing the percentage changes. China, since April, had gradually relaxed travel restrictions within the country, restarted industrial production, and increased investment in infrastructure projects once the peak of the coronavirus outbreak had passed.
Data released on Thursday indicated China’s April-June crude oil throughput reached 13.62 million barrels-per-day (BPD) up from 11.98 million (BPD) in the first quarter, and exceeding 12.96 million bpd in the same period last year.
Bloomberg reports that gasoline demand in Japan (world's top-4th oil consumer) recovered to a drop of 7% y-on-y in June (and diesel was down ~5% y-on-y), according to the Petroleum Association of Japan. Jet-fuel remains the laggard, down 70-80% below a year ago.
The Joint Oil Data Exercise group known as JODI reported a significant drop in Saudi oil exports. Saudi exports fell by 3.86 million BPD to just 7.748. Also, Norway oil production had dropped to 1.543 million barrels.
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