The Phil Flynn Energy Report
The Happy Place
Markets look like they’re in a happy place as stocks seem to be poised for an end-of-year melt up. The happy mood could even support oil, which, though still in an uptrend, has been reluctant to breakout higher as Covid-19 demand destruction concerns continue to cause worry. This worry seems a bit detached from stocks that are pricing in the culmination of record-low interest rates and record-high stimulus and, unless there is some devastating headline, it looks poised to drive off into the sunset of 2020 to a soundtrack of record high after record high.
Even oil, which may be worried that Russia might want to add more oil to the market in February, is getting caught off guard in the year-end Santa rally joy. Russia’s Deputy Prime Minister and former Oil Minister Alexander Novak stated that, although world oil demand will continue to recover next year, the recovery will likely fall just short of a full return to pre-pandemic levels in 2021. That’s pretty amazing, and what’s more amazing is how global inventories have come down even before we had a vaccine thanks to OPEC+ discipline, along with a drop in U.S. output and a now-recovering oil demand in Asia.
Money managers are getting into the spirit as they increased their net-long positions in WTI crude oil futures and options by 6,067 contracts to 336,645 in the week ending December 22: a 19-week high. Long-only positions increased by 3,333 contracts and short-only positions fell by 2,730.
Oil products are also looking solid. Gasoline demand is showing signs of recovery in both the U.S. and China, and they’re already driving like the Covid-19 nightmare never happened. For diesel, the global glut is easing and hopes for more air travel next year are giving us some support. Oil and products are also pricing in President-elect Biden’s likely regulation premium that will mean higher prices in the next 4 years. Big write-downs by oil companies, the lack of investment, and the silly predictions about “peak oil demand” will help create the environment for an oil price super cycle.
January looks like it will be warmer than normal across the United States. In a nutshell, that’s why natural gas prices have gotten hammered. Still, the U.S. LNG market is an amazing story and our cheap prices in the U.S. will feed Asia and Europe. Look to buy July calls.
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