The Phil Flynn Energy Report
Mixed messages and seasonal weakness have the energy markets in a very choppy trading range. Oil prices await the outcome of the OPEC+ decision while trying to get a handle on the Biden administration infrastructure plan, along with strong data from China that could increase oil demand expectations.
We also saw a report from the American Petroleum Institute (API) that was mixed, showing a surprise 3.910 million-barrel increase in weekly crude supply, but also a substantial 6.012 million-barrel drop in gasoline supply. Distillate supplies balanced it out with a 2.595 million-barrel increase, allowing the trade to see either bullish or bearish elements of the report, depending on your point of view. Oil bears are pointing to another wave of Covid-19 as their base case for bearishness.
Reuters reports that “Germany, Europe’s biggest oil consumer, has extended its lockdown until April 18 to contain a third [Covid-19] wave. A third of French people have entered a month-long lockdown, and most of Italy, including its capital Rome and its financial [center] Milan, have curbs on business and movements. Lockdowns in Austria, Norway, and Switzerland have also been tightened.
When the Organization of the Petroleum Exporting Countries and other oil producing nations, a group known as OPEC+, meet on Thursday, it will be difficult for them to ignore the new lockdowns that most analysts had ruled out for the medium term because of their economic cost. With oil prices making steady gains earlier this year, OPEC+ had hoped to ease output cuts, but industry sources say those plans in jeopardy.
The renewed lockdowns and problems with vaccination could prevent the recovery of up to 1 million barrels per day (bpd) of oil demand in 2021, Rystad Energy said.”
OPEC is also aware of this. Reports coming from OPEC+ state that Saudi Arabia has pushed OPEC to lower its demand forecast to justify a rollover of their current 8.0 million bpd production cuts through June.
The JTC gave in and revised oil demand down to 5.6 million bpd this year from 5.9 million barrels a day. If the Saudis decide to add to their voluntary 1.0 million bpd production cut, it could create an undersupplied market this summer.
Data from China suggests that the country that’s now projected to overtake the U.S. as the world’s largest economy in 7 years might go on an oil consumption binge in the coming months. China’s manufacturing data rose to 51.9 from February’s 50.6, suggesting that China will need more oil.
Still, Covid-19 worries are also hitting China, according to reports. If China starts more lockdowns, it could alter the demanding track. But this isn’t 2020, at least I don’t think it is: the world has a vaccine, it just must be distributed.
Europe is moving through the bureaucracy and is in worse shape than China and the U.S., so we believe that the lockdowns should be relatively short as more get vaccinated.
In the U.S., that advantage is going to mean a big jump in gasoline demand, and it’s already getting started. Reuters reports that "U.S. gasoline sales for 2021 have exceeded prior-year levels for the first time since last March, when officials first started to widely impose coronavirus lockdowns, according to a report on Tuesday from the Oil Price Information Service by IHS Markit.”
“However, demand still trails pre-pandemic levels, and the year-on-year increase is a bigger reflection of last year’s demand destruction rather than strong economic recovery this year, the report said. U.S. oil consumption crashed by 27% in April last year from the year prior, the Energy Information Administration said, as aircraft were grounded and people were forced to remain at home to curb the spread of the coronavirus.”
“Gasoline same-store sales for the week ended March 20 were 10.1% higher than 2020, said the report, which surveyed 25,000 fuel stations nationwide. Sales were still 16% below pre-pandemic levels.”
I expect that we’ll see continued improvement in gasoline consumption thanks to pent-up travel demand and the reopening trade. While we may not see everyone commuting to work for a while, we still expect a lot more people who will, meaning that gasoline supplies may be tight. Summer blends and refinery restraint will get our national average back above $3.00.
Oil prices should also get support if it looks like Joe Biden's infrastructure plan moves forward. Politico is reporting that “President Joe Biden will unveil a $2 trillion proposal Wednesday to transform America’s infrastructure over the next eight years, launching a mammoth legislative offensive to turn a long-running Washington punchline into a legacy-defining policy achievement in his first year in office.”
“Biden will travel to Pittsburgh where he will call for trillions of dollars in investments to rebuild the country’s roads, bridges and transit; improve access to clean water and broadband; expand access to elder and disability care and revitalize American manufacturing. Or, as the White House puts it, the plan would affect how we move, how we live at home, how we care for one another and how we manufacture.”
Can OPEC+ shock and awe us? Unlikely, but if the rollover is extended until June, that should reignite our oil rally.
Natural gas calls could be bought for the summer, even as we’re expected to get an early injection into inventory.
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