The Phil Flynn Energy Report
Riding The Waves
Reports of 50-foot waves created from Hurricane Zeta's winds around the Louisiana Offshore Oil PORT (LOOP) are not the waves that have oil traders most concerned. It is the second or third wave, depending on how you count it, of the coronavirus.
Shutdowns in Europe and more restrictions in U.S. cities and states are raising fears about another wave of oil demand destruction. The oil selloff exceeded the current real-time realities of supply and demand in a world that has seen green shoots of demand recovery and expected record U.S. GDP and a global supply reduction.
Reuters reported that the Petroleum Exporting Countries (OPEC) Organization and its allies closely monitored the deteriorating demand outlook. Together known as OPEC+, OPEC and its partners plan on tapering production cuts in January 2021 from a current 7.7 million barrels per day (BPD) to about 5.7 million BPD.
Oh, sure, the U.S. reported a crude build, yet a big part of that was the rebound in U.S. oil production and a jump in imports that were delayed from previous storms. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 4.3 million barrels from the last week. At 492.4 million barrels, U.S. crude oil inventories are about 9% above the five-year average for this time of year.
Total motor gasoline inventories decreased by 0.9 million barrels last week and are about 3% above the five-year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories fell by 4.5 million barrels last week and are about 17% above the five-year average for this time of year.
We saw both gasoline demand and distillate demand improve. U.S. oil production rose 1.2 million barrels a day, the highest level in two months. That increase in production is still well down from its high, and no doubt will fall again as Hurricane Zeta shut-ins will reverse its progress.
The sense is that the progress we have made in demand recovery will all be naught as Covid fears grip the markets. The Wall Street Journal reported that "France and Germany announced new lockdowns Wednesday in a sign of how Europe's strategy for containing the coronavirus has buckled under the pressure of mounting cases and deaths.”
In a national T.V. address, French President Emmanuel Macron announced strict restrictions. A nationwide lockdown, which will begin Friday and last at least one month, will require people to remain inside their homes while restaurants, bars, and shops deemed nonessential will close, he said.
German Chancellor Angela Merkel said the country's federal and state governments had agreed to a one-month shutdown of restaurants, bars, fitness studios, concert halls, and theaters, starting November 2. Hotels are barred from hosting tourists until the end of the month, she said, and public gatherings will be limited to 10 people from two households, according to the Wall Street Journal.
It is too early to know about real storm damage, but whatever there is, it will be the industry's cumulative effect. Reports that the Chalmette Louisiana Refinery saw a power outage but will restart is raising hopes that the damage will not be too bad.
Natural gas is down as the storm could give us a short-term demand hit. Still, the winter outlook for the market looks bullish.
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