A New Era Of OPEC+ Dominance

June 7, 2021 11:45 AM
The price of crude oil briefly touched $70.00 per barrel again for the first time since 2018
Banks are turning their back on U.S. energy, giving rise to a new era of OPEC+ dominance
Natural gas is getting geared up for another run
The Energy Report

The Energy Report

The Phil Flynn Energy Report 

$70.00 Again

The price of crude oil briefly touched $70.00 per barrel again for the first time since 2018 as the reopening trade increased demand. OPEC+ dominates the global oil market while U.S. rig count failed to respond to higher prices. China saw a slight dip in imports, but other nations saw an increase, continuing the trend of increasing demand and falling global inventories. Yet, the resumption of the Iranian nuclear talks and concern that a roadmap to a global corporate tax will hurt growth is slowing the impressive rise in the crude oil market.

Let’s look at rig counts. In the past when oil processing rose, rig counts would increase rapidly, raising U.S. production; that isn’t happening this time.

Reuters reported that the oil rig count was unchanged last week at 359, up from a cyclical low of 172 in August, but down from 683 before the arrival of the first wave of the Covid-19 pandemic. Shale producers are either showing incredible restraint or they can’t get funding. Banks are turning their back on U.S. energy, giving rise to a new era of OPEC+ dominance.

The Energy Report has argued that Biden’s climate agenda would ultimately make us more dependent on foreign oil and “make OPEC great again”; now the world’s largest oil trader agrees. Bloomberg News reports the following:

OPEC+ appears to be in control of crude prices as U.S. production is lagging pre-pandemic levels, according to a senior executive at the world’s biggest independent oil trader, Vitol Group.

The decline in U.S. drilling and output leaves little competition to efforts by the producers’ group to manage markets, Mike Muller, Vitol’s head of Asia, said during an online conference on Sunday. 

Brent crude closed above $70 a barrel last week for the first time in two years, as buyers demand more oil than producers are pumping. U.S. oil producers are still employing only half the rigs they used before the coronavirus struck. 

Meanwhile OPEC+, as the group led by Saudi Arabia and Russia is known, is easing barrels back on to the market as demand recovers.

“There’s a perception in the market that control is with OPEC+,” Muller said at the event hosted by the consultancy Gulf Intelligence. “It will take a long time for U.S. oil to come back” to production levels seen before the coronavirus outbreak, he said.

In China, Reuters reports

China’s crude oil imports fell 14.6% in May from a high base a year earlier, with daily arrivals hitting the lowest level this year, as maintenance at refineries limited consumption of the resource.

But refinery [utilization] rates are expected to rebound in coming months as refineries resume operations, analysts said.

May arrivals were 40.97 million [tons], data released by the General Administration of Customs showed on Monday, equivalent to 9.65 million barrels per day (bpd).

That compares to 9.82 million bpd in April and 11.3 million bpd in May last year when Chinese buyers snapped up cheap oil amid the spread of the coronavirus.

About 1.2 million bpd of China’s refining capacity was offline in May, up from 1 million bpd in April, according to Refinitiv analysts.

China’s crude arrivals are expected to reach 11-12 million bpd in the third quarter and refinery runs rise by 0.5 million bpd from the second quarter, Mukesh Sahdev, senior vice president of Rystad Energy said.

The Chinese government has been ramping up scrutiny of the oil industry by imposing taxes on key blending fuels and investigating crude imports at state energy giants and independent refiners.

The tax policy is expected to hit demand of bitumen blend, mostly shipped from Malaysia, which analysts say is based on heavy crude from Venezuela and Iran.

“Plugging the tax holes is supportive of the refinery runs and thus should lead to higher imports,” said Sahdev.

For refined oil products, customs data on Monday also showed exports in May fell to 5.41 million [tons] from 6.82 million [tons] in April, but jumped 38.9% higher versus a year earlier.

Total natural gas imports, including liquefied natural gas (LNG) and piped gas, reached 10.32 million [tons], up from 10.15 million [tons] in April and 7.84 million [tons] in May 2020.

Shiptracking data showed that China’s LNG imports hit more than 7 million [tons] in May, a record volume for the month, buoyed by robust industrial activity and power generation demand in southern China.

Natural gas is getting geared up for another run! Look to buy calls on breaks.

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.

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.