The Phil Flynn Energy Report
The sharp selloff in oil looks exhausted and the fact that German manufacturing data blew away expectations will likely ease oil demand worries.
On top of that, a ship blocking the Suez Canal will bottle up oil exports in a key global oil chokepoint. The Suez Canal and the SUMED pipeline are strategic routes for Persian Gulf oil and natural gas shipments to Europe and North America. Combined, these 2 routes account for about 9% of the world’s seaborne oil trade.
A 400-meter-long container ship, MV Ever Given, has gotten stuck in one of the narrowest parts of the Suez Canal, blocking the waterway. Reports say that it could block the canal for days.
In other news, lockdown fears in Europe can be put on the backburner. German factory activity rose to a record high in March and the services sector expanded after 5 successive months of contractions, surveys showed on Wednesday, suggesting Europe’s largest economy is shrugging off pandemic lockdowns according to Reuters.
This signals a rebound in oil demand that mirrors the jump we’ve seen in Asia. Thanks to stimulus, a strong global GDP forecast should kickstart oil demand even in the face of a slower reopening in the wake of Covid-19.
In the U.S., oil and gas demand looks strong and, if the API is any indicator of the EIA numbers, we should see strong U.S. gasoline demand, as vaccinations and pent-up demand should keep demand solid.
We saw a sizable 3.728 million-barrel drop in gasoline supply, which seems to confirm data from Gas Buddy that show gasoline demand is soaring. Distillate supply rose slightly by 246.000 barrels. Crude supply did increase by 2.927 million barrels, but that was eased a bit as we saw a 2.282 million barrels drop in Cushing, Oklahoma, signaling an increase in refinery runs.
This news should mean that the crude correction is over. The charts look at a possible extreme low around 5560 if we have another failure, but that looks less likely as the selling seems exhausted.
Still, U.S. energy production will struggle. This price break probably put the brakes on more projects, just as some shale firms were looking to start raising output. The impact of the pandemic on oil production is being felt.
Finally, the EIA reported that:
U.S. crude oil production averaged 11.3 million barrels per day (bpd) in 2020, down 935,000 bpd (8%) from the record annual average high of 12.2 million bpd in 2019. The 2020 decrease in production was the largest annual decline in the U.S. Energy Information Administration’s records. The production decline resulted from reduced drilling activity related to low oil prices in 2020.
In January 2020, U.S. crude oil production reached a peak of 12.8 million bpd. In March 2020, crude oil prices decreased because of the sudden drop in petroleum demand that resulted from the global response to the [Covid-19] pandemic.
The declining prices led crude oil operators to shut in wells and limit the number of wells brought online, lowering the output for the major oil-producing regions. In May, U.S. crude oil production reached its lowest average monthly volume for the year at 10.0 million bpd.
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