The Phil Flynn Energy Report
Oil prices are slipping into the holiday as a new strain of Covid-19 overshadows a relief package that Congress finally passed, along with rising concerns that Russia is getting trigger-happy on increasing oil output.
It seems Russia is seeing strong demand for their oil as Asian demand is solid and global inventories are tightening. Reports show that Russia wants to have OPEC+ raise output by 500,000 barrels per day (bpd) in February. Believe it or not, we may need that extra oil. Plus, there are breaking reports that an oil refinery in Russia has caught fire.
Javier Blass at Bloomberg points out that once again the global crude floating storage had another big drop last week at 2 million bpd, bringing the total quite close to “normal” levels, according to Vortexa data. Blass notes that the global crude oil supply and demand is clearly in a big deficit right now, despite the lockdown.
I agree. Crude oil has all the makings of a semi-super cycle as demand is coming back strong even as Europe continues on lockdown. U.S. demand will also start to rebound as the Covid-19 vaccines become more available. The massive cuts in spending would suggest that oil producers will not be able to meet demand once the world reclaims 100 million bpd demand. Those that doubt that super cycle prediction point to the U.S. shale patch. They believe that U.S. shale will be able to rise to the occasion and meet any shortfall. They point to a recent uptick in oil rig counts and the prospects for better prices.
Yet the shale optimists are not considering the financial condition of shale producers; they forget the inability for many to raise capital. Even if they can, banks who want to go green aren’t apt to lend money to dirty little oil companies. On top of that, we have an incoming administration that wants to get us off of oil. This goal will make it nearly impossible for shale to pick up the investment slack for the globe, which means we are headed towards a future oil price spike. Perhaps use the correction as an opportunity to get hedged for the coming spike.
Natural gas is getting support on strong international demand. Electricity shortages in China due to coal shortages is making U.S. LNG attractive.
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