The Phil Flynn Energy Report
Asia Deep Freeze
Energy shortage fears are spreading across Asia as winter has been relentless across the continent. Despite concerns of rising Covid-19 cases and mixed signals on Chinese oil imports, expectations for China oil demand is rising and is poised to move higher. Zerohedge reported that “The recovery in Chinese auto sales continued strong through the end of the year, with vehicle wholesales rising 6.4% and passenger vehicle sales rising 7.2% in December 2020,” not to mention strong manufacturing data.
U.S. refinery runs are on the upswing and the market is pricing in the risk of more regulation. We also have crude oil options expiration adding to the mix. While we could see a correction in prices in the short term, as we’ve said for months, the uptrend in oil is solid. We’re targeting $55 near-term, but we may consolidate.
It was reported that China’s total crude oil imports rose 7.3% in 2020 with record arrival imports in Q2 and Q3. That said, last month China’s December crude imports fell to their lowest level in more than 2 years. The slowdown came as it appeared that Chinese refiners had stockpiled enough crude oil at lower prices and waited to see if prices dipped before resuming patches.
Chinese refiners are busy trying to refine heating fuels as winter in Asia proves to be brutal this year. The demand for fuel is driving up prices and there are reports of some shortages. S&P Global reports that China's northern provinces faced multiple cold waves since December, causing energy shortages and forcing utilities to deploy all energy sources available. In the first week of January, Beijing recorded its coldest temperature since 1966 and other provinces hit their lowest mercury levels on record, too.
In Japan they’re also having major issues and are reverting back to burning oil to keep people warm. This comes as the spot liquefied natural gas market surges to all-time record highs. S&P Global reports that Asian spot LNG prices have risen to unprecedented levels due to February cargo shortages, transportation bottlenecks, supply outages, and record winter temperatures boosting end-user demand. They say that futures signal JKM LNG prices could ease for March delivery, but a looming cold snap in the Northern Hemisphere in the U.S. and Europe present significant upside risk for the global gas market.
Bloomberg News reports that “Power generators in Japan such as Tohoku Electric Power Co. recently bought several cargoes of low-sulfur fuel oil for the purpose of direct burning, said traders who asked not to be identified. These supplies can be used in oil-fired power plants, which are typically left in an idled state and utilized only when gas-fed facilities have been maximized. Several other companies including Japanese utilities and trading houses were also seeking cargoes in the spot market this week, they said. LSFO and crude oil used for power generation in Japan need to have an ultra-low sulfur content in order to meet environmental standards.”
This comes as U.S. natural gas production is faltering. In its January 2020 Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts that annual U.S. crude oil production will average 11.1 million barrels per day (bpd) in 2021, down 0.2 million bpd from 2020 as result of a decline in drilling activity related to low oil prices. A production decline in 2021 would mark the second consecutive year of production declines. Responses to the Covid-19 pandemic led to supply and demand disruptions.
The EIA expects crude oil production to increase in 2022 by 0.4 million bpd because of increased drilling as prices remain at or near $50 per barrel. This dynamic could and should have natural gas rally despite a normal seasonal downtrend and is also supportive for oil. Our base case is that oil demand will rise faster than production.
The EIA Status Report was supportive as refiners ramped up and gas and diesel demand popped. Still, big builds in distillates overshadowed a big improvement in jet fuel demand. The EIA showed that U.S. crude oil refinery inputs averaged 14.7 million bpd during the week ending which was 274,000 barrels per day more than the previous week’s average. Refineries operated at 82.0% of their operable capacity last week.
Gasoline production decreased last week, averaging 7.5 million bpd. Distillate fuel production decreased last week, averaging 4.7 million bpd. U.S. crude oil imports averaged 6.2 million bpd last week, increasing by 0.9 million bpd from the previous week.
Over the past 4 weeks, crude oil imports averaged about 5.6 million bpd, 14.9% less than the same 4-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 383,000 bpd, and distillate fuel imports averaged 346,000 bpd.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.2 million barrels from the previous week. At 482.2 million barrels, U.S. crude oil inventories are about 8% above the 5-year average for this time of year.
Total motor gasoline inventories increased by 4.4 million barrels last week and are about 1% above the 5-year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 4.8 million barrels last week and are about 9% above the 5-year average for this time of year.
Propane/propylene inventories decreased by 6.7 million barrels last week and are about 12% below the 5-year average for this time of year. Total commercial petroleum inventories decreased by 9.4 million barrels last week. Total products supplied over the last 4-week period averaged 18.8 million bpd, down by 5.8% from the same period last year.
Over the past 4 weeks, motor gasoline product supplied averaged 7.8 million bpd, down by 11.0% from the same period last year. Distillate fuel product supplied averaged 3.6 million bpd over the past 4 weeks, 3.6% from the same period last year. Jet fuel product supplied was down 30.0% compared with the same 4-week period last year.
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