The Phil Flynn Energy Report
Out Of Control
President Trump has lost it, the election as well as his common sense. The loss of life at the Capitol riots was inexcusable and the rule of law should be supreme. While the markets reacted to the storming of the Capitol with a quick drop and a spike in the VIX Index, the resilience of the market suggested that, despite the unrest, there is unwavering confidence in the United States.
Even the oil market dipped sharply for a downward spike a bit as protestors stormed the Capitol, but it quickly recovered. It instead focused on the bullish fundamental outlook for oil, as well as what the Biden administration will mean for oil prices: more regulations and a transition away from oil, as President-elect Joe Biden calls it. It’s a clear signal that we’re entering an era of higher prices.
This comes as oil saw support from the Energy Information Administration (EIA) which reported that, for the first time since 1986, the U.S. imported no oil from Saudi Arabia. This historic milestone shows not only the success of U.S. shale oil producers but also Saudi Arabia’s success in implementing the OPEC+ production cuts. While the naysayers said OPEC+ cuts would do little to get rid of global oversupply after the production war, they instead missed another historic turning point in the global oil market story — a story that, in 2020, was like no other.
Saudi Arabia’s decision to make a voluntary production cut of 1 million barrels daily (bpd) over the next 2 months will apply to exports, Bloomberg reported, citing Minister of Energy Prince Abdulaziz bin Salman. “This is a commercial, not a political, option,” he said. The minister added that the Kingdom has the capacity to withstand the reduction, and it will be similar to the output cut, which was implemented in June 2020 in cooperation with the UAE and Kuwait.
The drop in Saudi oil imports helped engineer an 8 million-barrel drop in weekly crude oil supply. That cut supplies to just 9% above the 5-year average for this time of year. We saw gasoline inventories increase by 4.5 million barrels last week and are at the 5-year average for this time of year. This is interesting because we’re seeing refiners cut back gas inventories to where there isn’t much oversupply. On top of that, the closing of U.S. refineries means that when U.S. gas demand comes back, we’ll be more dependent on gasoline imports.
The EIA reported that distillate fuel inventories increased by 6.4 million barrels last week and are about 4% above the 5-year average for this time of year. This comes as reports that jet travel is at its highest level since the Covid-19 shutdowns began.
Compact News reported that a South Korean delegation left for Iran on Thursday to negotiate the early release of an oil tanker and its crew that was seized in strategic Gulf waters this week. Iran's seizure of the tanker came after Tehran had urged Seoul to release the $7 billion (€5.7 billion) worth of Iranian assets frozen in South Korea under U.S. sanctions.
On Monday, Iran's Revolutionary Guard Corps troops stormed the South Korean-flagged MT Hankuk Chemi as it navigated the Strait of Hormuz, a narrow waterway between the Persian Gulf and the Gulf of Oman, and forced the vessel to a nearby Iranian port. Iranian officials said the vessel was seized for violating maritime environmental laws, as it was carrying 7,200 tons of "oil chemical products." The Guards said they arrested crew members from South Korea, Indonesia, Vietnam, and Myanmar.
The EIA reported that U.S. regular retail gasoline prices averaged $2.17 per gallon (gal) in 2020, 44 cents/gal (17%) lower than in 2019, and the lowest annual average since 2016. Gasoline prices at the beginning of the year were more than $2.50/gal; however, responses to the Covid-19 pandemic resulted in widespread reductions in passenger travel and gasoline demand, contributing to lower gasoline prices across the United States.
U.S. gasoline prices averaged $2.38/gal in mid-March, just before a national emergency was declared. Gasoline prices fell for several consecutive weeks, ultimately reaching $1.77/gal on April 27, the lowest average price since early 2016, according to the EIA's Gasoline and Diesel Fuel Update. Vehicle travel in April fell to its lowest monthly level on record, according to a Bureau of Transportation Statistics data series that dates back to 2000.
Vehicle travel and gasoline demand (measured as product supplied) began to increase in May, relative to April levels. From May through the end of the summer, U.S. gasoline inventories remained high because of sustained lower demand, even as refiners reduced gasoline production because of lower margins.
In most years, U.S. gasoline prices tend to be highest in the summer, when gasoline demand is usually higher. However, in 2020, U.S. gasoline prices were highest at the beginning of the year. Of the 10 cities surveyed in the EIA’s Gasoline and Diesel Fuel Update, 8 cities registered their highest gasoline prices for the year on January 6, and the remaining 2 cities (Chicago and Houston) registered their annual highs the following week, on January 13.
For oil, the uptrend is on track, along with the bullish strategies. $52 is a short-term target, but should test near $5,500 before this run in WTI is over.
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