The Phil Flynn Energy Report
Oil tried to go parabolic but retreated on demand concerns as gasoline demand is still stuttering. Yet in a move that could be just the coming attractions of a bull oil market run, there are more concerns about the stability of future oil supply. Exxon Mobil warned that If low oil prices continue for the rest of the year, their proven reserves could fall by 20%. In a regulatory filing, the company said, “certain quantities of crude oil, bitumen and natural gas will not qualify as proved reserves at year-end 2020.” A 20% oil reserve reduction would reduce supply by a shocking 4.5 billion barrels of crude and we’ve seen the same type of announcement by other companies.
Bloomberg News reported, “Chevron Corp. said in a filing Wednesday that it expects to revise its reserves downward by about 10%, mainly in the Permian Basin and Australia. Royal Dutch Shell Plc, BP Plc and Total SE have written off billions of dollars in reserves in recent weeks as the pandemic destroyed oil demand and prices, making some fields unprofitable to drill. Exxon had been the sole holdout during the current crisis, having not revised anything lower until now.”
The oil market traded mixed emotions surrounding the increasing likelihood of a Covid-19 vaccine by the end of the year. Short-term fears of a second wave are keeping oil subdued despite its significant supply drawdown and concerns that future supply might not be economically feasible to extract. This will cause a lack of investment and will ultimately leave the world under supplied in the future. Yet with a weak dollar and the possibility of a coronavirus relief package deal between the White House and Democrats or if the President acts on his own, it could have oil retrace its breakout run.
"The White House moved to increase the pressure on Democratic leaders to give ground in the coronavirus-aid negotiations, saying Republicans might walk away from talks and rely on executive actions by President Trump if an agreement isn't within reach by the end of the week, as reported by the Wall Street Journal. A coronavirus stimulus bill is one of the missing links in the global economy and with the labor market stalling along with gasoline demand, this should give us a boost that we need until researchers come up with a vaccine that now is hopefully going to be available in December.
The EIA reported that oil supplies are starting to significantly tighten. The agency reported U.S. commercial crude oil inventories decreased by 7.4 million barrels from the previous week. At 518.6 million barrels, U.S. crude oil inventories are about 16% above the 5-year average for this time of year. Total motor gasoline inventories increased by 419,000 barrels last week and are about 8% above the 5-year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 1.6 million barrels last week and are about 27% above the 5-year average for this time of year. Propane/propylene inventories increased by 2.3 million barrels last week and are about 13% above the 5-year average for this time of year. Total commercial petroleum inventories decreased last week by 2.1 million barrels last week. Total products supplied over the last 4-week period averaged 18.3 million barrels per day (bpd), down by 13.5% from the same period last year. Over the past 4 weeks, motor gasoline product supplied averaged 8.7 million bpd, down by 9.1% from the same period last year. Distillate fuel product supplied averaged 3.6 million bpd more than the past 4 weeks, down by 8.7% from the same period last year. Jet fuel product supplied was down 40.9% compared with the same 4-week period last year.
While long-term oil production expectations have fallen, in Canada, they may be rising a bit. Rigzone reported that IHS Markit recently projected that Canada's oil sands production should hit nearly 3.8 million bpd in 2030, representing an almost 1.1 million bpd increase from current levels. Although this year's decline in oil sands output tied to the "Covid-19 Shock" will be unprecedented and approach 175,000 bpd, IHS Markit contends the trajectory of oil sands production over the next decade should change little compared to pre-pandemic expectations. The firm pointed out in a written statement emailed to Rigzone that the 3.8 million-bpd projection for 2030 is just 2.6 percent lower than its pre-pandemic forecast of 3.9 million bpd.
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