The Phil Flynn Energy Report
The OPEC+ Joint Technical Committee meeting didn’t offer any concrete decisions on whether they would extend cuts by 6 or 9 months, but at least suggested that it would be one or the other. Oh sure, the Saudi Energy Minister is saying that the jury is still out on an oil output cut extension, yet the market feels this is just a way for the group to under-promise and over-deliver. While this fell short of what market bulls were hoping for, the expectation for some type of extension was better than a sharp stick in the eye.
While the market showed some disappointment with the OPEC+ non-decision, it rallied back, as the global outlook for future demand gets better for seasonal reasons along with the possibility that we’ll get a vaccine and travel will start to return next year. The energy sector has been beaten down and not even a surprise 4.174-million-barrel increase in the American Petroleum Institute (API) crude supply number could weaken the oil market’s attempts at a price recovery. Part of it is optimism about the rebound in the global economy and part of it is support for a reported big 5.024-million-barrel draw in U.S. distillate supply. Gasoline came in with a slight 256,000-barrel increase.
January crude is now the lead contract and needs to close above $42.15— that should solidify a technical bottom. Lockdown concerns are being overtaken by vaccine optimism.
Geopolitical risk to supply may be focusing again on Nigeria. Reuters is reporting that oil companies have asked security services to tighten surveillance as violent protests against police brutality and the expected sacking of hundreds of workers worsen desperation in the region. Already unemployment is above 40% in Nigeria's energy regions and observers say further job losses could aggravate problems of pipeline tapping, illegal oil refining, and pirate attacks.
Interestingly, the rates for storing oil are soaring. Reuters reports that global container shipping rates have surged to record numbers on a spike in restocking demand in the United States and Europe, container scarcity at export hubs, and changes in freight flows due to the Covid-19 pandemic. The Freightos Baltic Global Container Index (FBX), a weighted average of 12 major global container routes, rose to $2,359 per 40-foot equivalent (FEU) container this week, the highest on record and up 30% since July 1. The cost to ship a container from China to the U.S. East Coast, a key global retail market, topped $4,750 this week, up 42% since July and at a new record.
For oil products, we’re coming into the strong seasonal pattern trades. The old widow maker, a pattern of long gasoline and short heating oil, is always one that can give you a stress test, but it works more often than it doesn’t. There are also a lot of seasonal heating oil spreads that go on as the petroleum sector prepares for the highest demand period of the year.
Weather has hurt natural gas prices despite the fact that, on paper, the fundamental outlook should be the most supportive we’ve seen going into winter in years. Jon Kemp of Reuters points out that the U.S. gas market has rebalanced after low prices began to cure the glut. Kemp says that U.S. gas inventories are heading into winter at a moderate level after ultra-low prices earlier this year curbed production, encouraged record consumption by power producers, and ended the threat of an inventory glut. For more than two decades, the lowest prices had offset mild temperatures that would otherwise have pushed working gas stocks in underground storage to record levels.
Instead, working stocks ended the first week in November and only 175 billion cubic feet (BFC), about 5%, above the 5-year average. This is well within the typical yearly variation. With stocks normalizing, futures prices more than doubled between June and the start of November, from $1.50 per million British thermal units (MMBtu) to more than $3.20. What happens next, Kemp says, depends critically on temperatures. Electricity producers have continued to retire coal-fired generators, ensuring that marginal energy consumption in any cold spell will rely on gas more than ever before. If there is a sustained period of colder than normal weather in December and January, such as in 2016/2017 and 2017/2018, inventories will dwindle rapidly and push up prices sharply. If temperatures remain close to the seasonal average, or warmer, gas prices are likely to fall back towards the summer lows to limit a renewed inventory build.
Andrew Weissman of EBW Analytics agrees. He says that the natural gas market is staring down projections for repeated triple-digit storage builds and the resumption of a growing year-over-year storage surplus, likely weighing on NYMEX gas futures in the near term. Already, falling injections into fast-cycling storage facilities may indicate marketers are holding out for lower pricing before building summer inventories. Falling weather-driven demand, weakening spot market prices at Henry Hub, and a likely boost in production with the end of spring pipeline maintenance may all act as additional near-term bearish catalysts for natural gas into early June. By mid-to-late June, however, NYMEX gas may begin to show strength as rising power sector demand, growing Mexican exports, firm LNG demand, and seasonal trends point to likely price increases into mid-summer.
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