The Phil Flynn Energy Report
Sucking It Down
China is still sucking down oil, yet oil struggles as vaccine safety concerns rise.
Reuters reports that, "China resumed storing crude oil in the first two months of the year with almost 1 million barrels per day (bpd) being added to inventories in January and February, rebuilding stockpiles after a rare drawdown toward the end of last year.”
China's demand, along with Indian oil demand, has been the main driver of oil markets. Additionally, general demand optimism has also had an influence, as the market expects that we’ll see oil demand come back to pre-pandemic levels quickly as the world gets vaccinated. However, now there’s a fly in the ointment.
The Daily Mail reports that, "Portugal and Spain have joined 18 European countries in suspending the use of the AstraZeneca [Covid-19 vaccine] over unproven fears it causes blood clots. The moves come despite scientists and the European Medicines Agency dismissing fears over clots, with warnings that the pausing of inoculations was 'reckless' and would have 'consequences’. Thirteen European countries have now suspended their use of the shots altogether, while another five have black-listed specific batches despite reassurances from the UK, the WHO, and the manufacturers that the jab is safe.”
The reports have rattled the oil markets, which have been betting that the amazing comeback in global oil demand was going to continue. The concerns about the AstraZeneca vaccine now push the ball further away from the goal line. India saw 26,000 new Covid-19 cases, which was the highest in nearly 3 months.
Oil is also struggling as U.S. refiners have found it difficult to bounce back from the Texas power crisis. Expectations of another crude build are holding us back. Still, big draws in gasoline are expected as U.S. gasoline demand has been rising. Don't look for a big break at the pump, we’re starting the countdown to those summer-time gas blends. But hey, at least summer is coming!
The market will also focus on U.S. production. Joe Biden’s executive action to allegedly combat climate change, including blocking new leases for oil drilling on federal lands and waters, ordering a review of fossil-fuel subsidies, and other measures to overhaul U.S. energy, is making it clearer that U.S. oil and gas investment isn’t welcome.
Of course that doesn’t mean that the demand is going away overnight— it probably won’t go away for decades, if ever. However, it does mean that U.S. energy costs will go up, as we’ll rely on more imports of oil from foreign sources.
OPEC is gladly willing to fill that void, but at their own pace and their own price. They’ll do so by retracing production so U.S. consumers can have the pleasure of paying a huge price to save the OPEC+ cartel and, oh right, the planet.
Natural gas is getting crushed in the front end of the curve as spring and the shoulder season are in full swing. The cold blast that we’re experiencing should be short-lived. Falling U.S. output and strong global demand for LNG should get the market to rebound, so use market weakness to buy calls and hedge.
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