Maybe It Wasn't Such a Great Idea After All

July 31, 2020 07:49 AM
OPEC increases production on August 1
Brent Crude futures move from backwardation into contango
Oil got a bit of a bounce on Chinese economic data
Energy Report

Energy Report


The Phil Flynn Energy Report 

More Barrels at a Bad Time 

OPEC+ is going to rollback cuts and add 1.5 million barrels of oil to the global oil market starting August 1. When OPEC+ decided to raise output early last month, it looked as if the market was going to need those extra barrels. Now with more uncertainty about a Covid-19 second wave and a devastating weekly jobs reports, a historically wrong U.S. GDP number, perhaps at this time, a production increase might not be a great idea.

The Brent Crude futures price curve has slipped from backwardation into contango, signaling that the tight market we had in Europe is reversing. A Congress that can't seem to make progress on a new stimulus bill may give the oil bulls pause. Yet overnight the White House appears to be willing to drop Senate Majority Leader Mitch McConnell's demands for a "liability shield" for companies from the fallout from the coronavirus. If embraced by other Republicans, it will be up to the Democrats to give up something to get a deal.

The pressure will be on for both sides of the aisle to make a deal. The U.S. GDP number is a reason after it took a 9.5% hit in the second quarter of 2020 compared with a year ago. That was the biggest quarter-on-quarter and year-on-year drop in economic activity since the World War II. More importantly, weekly jobless claims number that came in at a higher than expected 1.45 million. That, according to Dow Jones, was the 19th straight week in which initial claims totaled at least 1 million and the 2nd consecutive week in which initial claims rose after declining for 15 consecutive weeks. Each one of those 1.45 million people has a vote in the election, I assume. They’ll vote against the party that they believe has added to their economic pain. 

Of course, oil and products got hit hard on the GDP and jobs data and news that Iraq oil exports went higher but there is economic optimism by blowout Amazon earnings. That may suggest that in some parts of the economy things are not quite as bad as those dismal numbers indicate. Besides, the EIA is showing the most significant crude draw in years, and that’s hard to ignore.

Oil got a bit of a bounce on China's data. Reuters reported that, "China's manufacturers said another improvement in business activity this month, though still not very widespread. The purchasing managers' index edged up to 51.1 in July, up from 50.9 in June, and above the 50-point threshold separating expanding activity from a contraction." So, the data should suggest demand and it will be up to Washington to get their act together to keep things from slipping backward.

To make matters more confusing is the weather outlook in the Atlantic. Fox News reported that the National Hurricane Center declared Isaias a hurricane late Thursday night as it nears the Bahamas after the storm knocked out electricity and drenched Puerto Rico and the Dominican Republic earlier in the day. Hurricane Isaias, according to the latest track, could be a significant energy demand destruction event. Many times people look at hurricanes as production destruction events, but in most cases, the opposite is exact. Yet there are a couple more tropical disturbances in the Atlantic, one that has a 40% chance of becoming a cyclone in the next 48 hours.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.