Oil Fundamentals Are Signaling Tighter Markets And Higher Prices

March 9, 2021 01:45 PM
Oil prices are back on the rise as the market realizes that oil fundamentals are signaling tighter markets and higher prices
OPEC, which once feared U.S. shale producers, is no longer fearful, as they declared victory by rolling over their production cut
The U.S. experienced warmer-than-normal heating seasons, resulting in lower domestic propane consumption than in the previous 2 years
The Energy Report

The Energy Report


The Phil Flynn Energy Report 

Drone Blown

Oil prices are back on the rise as the market realizes that oil fundamentals are signaling tighter markets and higher prices. The Monday oil dip came as speculators piled into the market on reports of the Houthi rebel drone attack on Saudi Arabia, then they exited by the close. While the run in Brent oil may have been premature, it’s probably just a preview of more bullish price moves in the days ahead.

We’ve been warning for months that the dramatic reversal of investment in oil and gas would drain inventories and leave the market undersupplied; now it’s becoming more apparent to the trade. With U.S. inventories getting ready to show the impact of the Texas power outages, we may start to see oil supplies fall below the 5-year average at a time when we're seeing U.S. demand pick up. The question is this: Will it show up in the oil numbers this week or next week? 

Platts reported that we saw refinery run losses of 70 million barrels with oil production of 20 to 25 million barrels. Already, supplies of both gasoline and diesel are below the average range for this time of year and that’s only going to get worse. 

U.S. oil production is going to struggle to come back as investors don’t want to make investments in shale only to have the Biden administration lay down the hammer. OPEC, which once feared U.S. shale producers, is no longer fearful, as they declared victory by rolling over their production cut.

This means that consumers in the U.S. better get ready for a summer of pain at the gas pump. Reduced stimulus checks will go into gas tanks and the money will be going out to more foreign oil producers, as U.S. shale recovery will be slow. I don’t think Joe Biden is aware of the negative impact that his energy policies are going to have on Americans. He refuses to stand up to OPEC, but at least India is doing the job for us.

Reuters reported the following:

India has asked state refiners to speed up the diversification of oil imports to gradually cut their dependence on the Middle East after OPEC+ decided last week to largely continue production cuts in April, two sources said. India, the world’s third-biggest oil importer and consumer, imports about 84% of its overall crude needs with over 60% of that coming from Middle Eastern countries, which are typically cheaper than those from the West. Most of the OPEC+ producers, led by the world’s top exporter Saudi Arabia, last week decided to extend most output curbs into April. India, hit hard by the soaring oil prices, has urged producers to ease output cuts and help the global economic recovery. In response, the Saudi energy minister told India to dip into strategic reserves filled with cheaper oil bought last year.

The U.S., even with the pullback in shale production, still helped keep Asia warm during its extremely cold winter. The Energy Information Administration (EIA) said that the U.S. exported more propane than distillate due to strong demand.

The EIA says that in 2020, according to their Petroleum Supply Monthly, U.S. exports of propane reached record levels, increasing 13% and surpassing distillate fuel oil as the country’s top petroleum product export. U.S. exports of distillate fuel oil fell to their lowest level since 2016. 

The increase in propane exports was driven by strong petrochemical and heating demand in Asia during a year of more U.S. production and less U.S. consumption. The United States experienced warmer-than-normal heating seasons in both the first and final months of the year, resulting in lower domestic propane consumption than in the previous 2 years.

Although natural gas and crude oil production fell in the United States during 2020, propane production at natural gas processing plants increased 5.6% from 2019, which more than outweighed the decline in refinery production of propane. 

In 2020, 76% of U.S. propane was produced at natural gas processing plants; the remaining 24% was produced at petroleum refineries. Propane production outside of the United States decreased because major exporters such as Saudi Arabia and Russia reduced their propane production as a result of crude oil curtailments; most propane production in these countries is associated with crude oil. 

Expanded U.S. export capacity, along with increased domestic production and lower domestic consumption, allowed the United States to fill the supply gap and capture greater global market share. U.S. export capacity grew by an average of 330,000 barrels per day (bpd) during the second half of 2020.

In contrast, distillate fuel oil exports, which usually account for the largest share of U.S. petroleum product exports, decreased in 2020. U.S. distillate exports of 733,000 bpd in May 2020 were the lowest for any month since June 2011, mostly because of less global demand. 

Distillate demand and production remained relatively low for the remainder of the year, unlike propane demand and production. U.S. distillate exports were also relatively low in Q4 of 2020 when propane exports were at their highest.

U.S. refiners may have faced increased competition in world distillate markets as a result of less expensive distillate from Europe. Spot prices for distillate from Europe were, on average, 12 cents per gallon lower than U.S. New York Harbor distillate prices in Q4, compared with 7 cents per gallon lower in the first 3 quarters.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.