The Phil Flynn Energy Report 

America Held Hostage: Day 5

The hack attack on the Colonial Pipeline is entering day 5 and is already causing some spot shortages of gasoline on the East Coast, as they’re losing 1.25 million barrels of gasoline per day. Airports are also reporting shortages of jet fuel which could impact flight schedules. 

The group that’s claiming responsibility for the attack is called DarkSide. They’re from Eastern Europe and say they’re apolitical and only in it for the money. That said, this attack has gone too far and requires a national effort to stop such attacks, as they risk U.S. security and put American lives at risk. Still, Biden says that Russia has “some responsibility” to come down on the hackers that may be based in Russia.

Colonial Pipeline says they hope to substantially restore service to the pipeline by the end of the week and have reopened some auxiliary pipelines that they’re operating manually in order to avoid the risk of encountering latent bugs in the computer network. Yet, "substantially reopened" doesn’t sound all that convincing or comforting.

The crude oil market and gasoline futures sold off on the news. Oil also faced pressure because of reports that at least 1 Gulf Coast refiner is reducing runs because of the Colonial Pipeline hack. Reports that traders are booking cargoes of gasoline from Europe are keeping futures prices calm as supply backs up on the Gulf Coast and drops on the East Coast. Still, there are fears that panic-buying of gasoline on the East Coast could cause tanks to run dry if the pipeline doesn’t come back online.

Bloomberg News reported that, due to jet fuel shortages, "American Airlines Group Inc. has added additional stops to [2] long-haul flights originating from Charlotte, North Carolina. Airlines flying out of Philadelphia International Airport are burning through jet-fuel reserves and the airport has enough to last ‘a couple of weeks,’ a spokeswoman said.”

Oil also has geopolitical risk issues that are hanging over the market. Fox News reported the following:

U.S. warships Monday in the Strait of Hormuz fired warning shots at armed Iranian speedboats that had approached within 150 yards of the American flotilla, U.S. officials said. 2 of the Iranian speedboats, armed with machine guns, broke off from a group of 13 Iranian craft and headed toward the U.S. formation at a high rate of speed, according to U.S. Naval Forces Central Command (NAVCENT). 

"After U.S. naval ships repeated verbal and acoustic warning, sounded five blasts of the ship’s horn, and fired warning shots," the [2] Iranian crafts withdrew, according to a statement by NAVCENT. The formation of [6] U.S. warships was escorting the guided-missile submarine USS Georgia through the Strait and into the Persian Gulf.

Also, the Wall Street Journal reports that:

Israel struck scores of targets in Gaza and Palestinian militants launched more rockets early Tuesday, as tensions from days of clashes in the contested city of Jerusalem dramatically escalated overnight and both sides prepared for a wider conflict. 

Israel’s military said it has so far struck 130 targets belonging to Gaza-ruler Hamas, including weapons manufacturing sites, military facilities, and tunnels on the border that Israel says Hamas uses to launch attacks. Israel said it targeted a Hamas battalion commander and 15 Hamas military operatives. 

The Palestinian Ministry of Health said 24 people have died, mostly from Israeli strikes, including nine children. Israel’s military said it is investigating reports that children were killed and that some casualties may be the result of rockets that exploded in Gaza before reaching Israel.

The oil market is still in an uptrend and, despite demand concerns in India, we expect that demand will exceed expectations on the upside. We expect a sizable 4 million-barrel crude draw this week and a drop of 2 million barrels of gasoline, along with a 3 million-barrel drop in distillation. 

Next week’s numbers will likely be crazy due to the Colonial Pipeline hack. In the short-term, concerns of reduced runs are pressuring oil. That said, it’s turnaround Tuesday, so we could also look at the big picture, which is still bullish for oil.

Argus Media reported the following:

OPEC has raised the forecast call on its members' crude this year by over 200,000 [barrels per day (bpd)] after trimming its projection for non-OPEC supply by a similar amount and keeping its global oil demand estimate unchanged. OPEC now expects demand for its crude to average 27.65 [million bpd] in 2021, almost 5.2 [million bpd] higher than last year and around 2.7 [million bpd] higher than Argus' estimate of the group's April production. Call on OPEC crude is projected to rise from 26.48 [million bpd] in the second quarter to 28.7 [million bpd] in the third and 29.54 [million bpd] in the fourth, according to the organization’s latest Monthly Oil Market Report (MOMR). 

The upward revision is underpinned by a downgrade in the group's forecast for non-OPEC supply, which it now expects to grow by 700,000 bpd to 63.6 [million bpd]. Last month's report projected a 930,000 bpd rise to 63.83 [million bpd]. Growth forecasts have been revised down for the U.S., Norway, Canada, and Brazil. 

OPEC sees U.S. crude output dropping by 280,000 bpd this year, compared with its previous forecast for a 70,000 bpd decline. The Permian basin is the only U.S. tight oil play expected to see any output growth this year, building on a 140,000 bpd increase in 2020. Last year's growth in the Permian came in the face of sharply lower oil prices and indicates that "some U.S. tight crude production may have become more resilient to a lower oil price environment," OPEC said.

On the demand side, OPEC has kept its overall forecast unchanged from last month's MOMR. It expects global oil demand to grow by 5.95 [million bpd] to 96.46 [million bpd] this year, partly reversing last year's 9.48 [million bpd] drop. Slower than anticipated demand in the U.S. and Canada in January-March combined with a steep rise in Covid-19 infection rates in India and Brazil have prompted a downwards revision in the estimate for the first half of this year, but that is offset by a slightly higher forecast for the second half. "Positive weekly transportation fuels data from the U.S., and the acceleration in vaccination programs in many regions allows for optimism," OPEC said.

Don’t miss out on my wildly popular trade levels on all major markets, as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.