The Phil Flynn Energy Report
All About The Base
Despite rising Covid-19 fears, oil prices, are resilient above $40 a barrel. Hopes of more economic stimulus in the U.S. and the E.U. are supportive as well as data on the U.S. oil and gas rig count that fell to historic lows. The possibility of oil building a $40 base floor could set the stage for future rallies later this summer. Demand is still on an upward trajectory, and rising geopolitical risk is also at play.
An explosion and fire at Iran's main nuclear facility last week, along with increasing tensions between China and Japan, is adding another geopolitical risk factor for oil. There are reports that King Salman bin Abdulaziz of Saudi Arabia has been admitted to a hospital in Riyadh early Monday for medical tests. Overall we are predicting that the next big move on oil will be higher after the current basing technically. Production losses will continue, and demand growth will fight back.
While the EIA weekly petroleum report doesn’t show it yet, we’re going to see a drop in U.S. oil production. At the same time, some products have restarted some production. There are still more shut down, taking place. The Baker Hughes oil rig count also continues to fall, hitting all-time historic lows. Baker Hughes reported last Friday that U.S. oil and gas rigs fell to an all-time low of just 253 rigs. The oil rig count has fallen 19 weeks in a row and the overall combination of oil and gas rigs 11 weeks in a row. The drop in rig counts is another sign that U.S. output will be restrained in the future. Demand growth is critical but still showing signs of improvement all over the globe.
Reuters reported that Japan's oil imports fell 14.7% in June from the same month a year earlier. The drop wasn’t as pronounced as in May when they fell 25% year on year. Also underscoring the impact of the virus, Japan's exports plunged 26.2% in June from a year earlier, the Ministry of Finance data showed on Monday. While fuel demand has recovered from a 30% drop in April after many countries imposed strict lockdowns, usage is still below pre-pandemic levels. U.S. retail gasoline demand is falling again as infections rise.
Gasoline demand stalled last week, and the market will want to see signs that it will start to grow again. RBOB is the weak sister in the complex, and amazingly distillates are looking stronger due to more robust manufacturing data.
Chevron Corporation finally got a big deal when it announced today that it has entered into a definitive agreement with Noble Energy, Inc. to acquire all of the outstanding shares of Noble Energy in an all-stock transaction valued at $5 billion, or $10.38 per share. Based on Chevron's last closing price, and under the terms of the agreement, Noble Energy shareholders will receive 0.1191 shares of Chevron for each Noble Energy share. The total enterprise value, including debt, of the transaction, is $13 billion. They say that "The acquisition of Noble Energy provides Chevron with low-cost, proved reserves and attractive undeveloped resources that will enhance an already advantaged upstream portfolio. Noble Energy brings low-capital, cash-generating offshore assets in Israel, strengthening Chevron's position in the Eastern Mediterranean. Noble Energy also enhances Chevron's leading U.S. unconventional position with de-risked acreage in the DJ Basin and 2,000 largely contiguous and adjacent acres in the Permian Basin.
Is the summer part over for natural gas bulls? Andrew Weissman of EBW AnalyticsGroup said that "Last week could mark a major turning point for natural gas. Despite a bullish Weekly Storage Report on Thursday and the imminent arrival of the hottest weather of the year, prices at Henry Hub never rose above the low- to mid-$1.70s, ending the week at just $1.725 per million British thermal units. This weak cash market response prevented the natural gas market from rallying after Thursday's EIA Storage Report, sending a strong ‘sell’ signal and pushing futures lower during the hottest days of the summer. Over the next few weeks, significant further losses are likely." Time to buy puts on natural gas.
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