The Phil Flynn Energy Report
The Road To Deficit
Oil prices are surging to new 11-month highs as global oil supplies are projected to be in deficit in 2021, according to OPEC+. The Energy Report readers know that we’ve been projecting the same, as historic cuts in production, a massive pullback in oil and gas investment, and demand that’s already recovered to provide levels in China and India will suck down supply.
OPEC+ projects that the oil market will be in deficit throughout 2021, peaking at 2.0 million barrels per day (bpd) in May, according to Reuters. That’s despite having lowered its forecast for oil demand growth this year to 5.6 million bpd, 300,000 bpd less than OPEC’s most recent estimate. Oil demand is on track to get back above 100 million barrels later this year and, even with the possibility of more oil from Iran and OPEC, we may need to see prices above $65 per barrel to meet that demand.
U.S. oil producers will be hampered by the Biden administration: if banks and pension funds avoid oil and gas investments to improve their public and political images, U.S. consumers will be expected to bear the brunt of the possible repercussions. That said, the market hopes that consumers can afford higher gas and heating bills with the possibility of more stimulus money coming their way.
This will please the OPEC+ crowd as they adjourn by video conference for what will be the 14th OPEC and non-OPEC Ministerial Meeting. While the group isn’t expected to announce any changes to current production plans, I assume they’ll be giving virtual high-fives to celebrate the Biden administration’s moves to help the group maintain market share from U.S. shale oil producers.
Biden's plan to switch the U.S. Federal fleet to all-electric vehicles will add to our budget deficit as reports show that the cost of running an electric car fleet is almost double what it takes for oil and gas. According to the GAO, the 5-year cost of operating an electric vehicle was $33,060 as of 2019, versus a cost of $16,904 for a conventional (gas or diesel) vehicle.
The American Petroleum Institute reported a bullish API report showing crude down 4.261 million barrels last week, helped by a 1.885 million barrel draw in the Cushing delivery point. Gasoline supply fell by 240,000 barrels and distillates by 1.622 million barrels, giving more support to a market that was already rallying on solidly; the bullish fundamental picture becomes more clear.
Global supplies are also tightening. Bloomberg News reported that, "China’s crude stockpiles fell to the lowest level in almost a year amid a global drawdown in inventories that are being driven by a tighter supply-demand balance and higher costs to hoard oil. Inventories capped a seventh weekly decline last week, dropping to 990 million barrels, according to market intelligence firm Kayrros. While that’s the least since February 2020, stockpiles are still 16% higher than a year earlier.”
Natural gas is moving! Andrew Weissman of EBW Analytics says the following:
"Surging Arctic cold projected to reach the Midwest led the March natural gas contract to briefly eclipse $3.00/MMBtu intraday Tuesday before receding. Nonetheless, near-term technicals have turned bearish and trader exuberance is muted. Despite adding 105 Bcf of demand in the past week, the March contract has only gained a mere 14.3¢ since last Wednesday. Henry Hub natural gas spot market prices, however, traded well above the screen at $3.18/MMBtu—with another 20+ Bcf/d of demand coming. Strong cash prices are likely to trigger another run towards $3.00/MMBtu over the next 7-10 days.
This spring, higher LNG demand, lower production, and easy domestic demand comparisons to 2020 are likely to drive further gains for gas. Longer-term, the recent cold surge increases the chances that LDCs refilling storage will drive prices high enough to limit US LNG exports this summer."
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